Key members of Congress said yesterday they will draft legislation to impose regulatory oversight over the credit-rating industry, saying they are concerned about the power of rating firms and frustrated by federal regulators' reluctance to curb it over the past decade.
The Securities and Exchange Commission began studying the issue in 1994 but has taken no action. Since late last year, the federal agency has been in talks with the major credit raters to establish a "voluntary framework" to oversee their business, which remains virtually unregulated. But during a hearing yesterday, Rep. Richard H. Baker (R-La.), chairman of the Financial Services Committee's subcommittee on capital markets, insurance and government-sponsored enterprises, said he had "no confidence" that such a voluntary initiative would work.
Baker called the rating business a government-granted monopoly because the SEC has given a national designation to only five rating firms, and investors have come to view it as the federal agency's stamp of approval. Baker also expressed concerns about when raters issue unsolicited ratings of companies that did not seek a rating but feel compelled to pay the raters' fees. The raters have companies "by the throat," he said.
Critics have voiced other concerns about the credit raters, who wield power by handing out letter grades to companies and countries that want to borrow money by issuing bonds. The major raters, for instance, get the bulk of their revenue from the fees they charge to the entities they rate, raising questions of conflicts of interest.
After the hearing, Baker said he would draft legislation with the possibility of introducing a bill before the end of the year. Already, he said, his staff has drafted memos to him involving "legislative concepts." He said legislation would set up federal oversight of the credit raters. It would also address conflicts of interest and unsolicited ratings. In addition, he said it would delineate how credit raters receive the SEC's national designation and how the designation could be withdrawn.
SEC Chairman William H. Donaldson said in March that if Congress wants "rigorous" oversight of the credit raters, it would have to enact legislation. But major raters, such as Moody's Investors Service, said they support a voluntary initiative. "We think a voluntary regime would deliver the transparency and accountability that Congress is looking for," said Moody's spokeswoman Frances G. Laserson.
Paul E. Kanjorski (D-Pa.), the ranking Democrat on the capital markets subcommittee, wrote a letter yesterday to Donaldson, requesting the SEC's "technical assistance" to understand what legislation it needs to impose regulatory authority over the rating firms. Kanjorski asked for an answer by June 6.