The chairman of the Securities and Exchange Commission told a Senate committee yesterday that if it wants "rigorous" oversight of the credit-rating industry, Congress will have to enact legislation to give the agency power to regulate the business.
In testimony before the Senate Banking Committee about the state of the securities industry, SEC Chairman William H. Donaldson said his agency lacks the authority to regulate the credit raters, which wield great influence in the debt markets by assigning letter grades to companies and countries that want to issue bonds. Last week, the SEC proposed what would be the first definition of a nationally designated credit-rating firm, called a "Nationally Recognized Statistical Rating Organization," or NRSRO. But Donaldson said the SEC could do little more unless Congress acts.
"The commission believes that to conduct a rigorous program of NRSRO oversight, more explicit regulatory authority from Congress is necessary," Donaldson said. "We believe that a well-thought-out regulatory regime could provide significant benefits in such areas as recordkeeping and addressing conflicts of interest in the industry."
Some members of Congress have expressed support for legislative action. Sen. Richard C. Shelby (R-Ala.), the Banking Committee chairman, told Donaldson yesterday that "the committee wants to make sure you have the authority to do your job."
Donaldson said the SEC is working with the major credit raters on a "voluntary framework" to oversee their codes of conduct. But he said that even if the industry adopts it, the SEC still would lack "the same authority that actual legislative authority could" provide.
The big three raters -- Moody's Investors Service, Standard & Poor's and Fitch Ratings -- say they ably police themselves through internal policies. "We don't believe there is a need for Congress to legislate in this area," said Marjory Appel, S&P's senior vice president of marketing and communications.
Donaldson said that if a credit rater failed to abide by its voluntary initiative, the SEC could not take action against it. Also, he said, the SEC staff would have to rely on inspections by third parties hired by the rating companies.
After the hearing, Donaldson said that while the SEC is continuing to talk to credit raters about its voluntary initiative, it would pursue a "parallel track" with the Senate Banking Committee on legislation that would empower the SEC. "At least, so far, what's been offered up by the industry as a voluntary system doesn't give us what we need," he said.