New SEC Rules Aim to Prevent Credit-Rating Conflicts of Interest

Federal regulators approved new rules yesterday aimed at preventing conflicts of interest and increasing accountability for credit-rating agencies, an industry whose overly optimistic assessment of subprime mortgages helped cause the current financial meltdown.

The requirements adopted by the Securities and Exchange Commission will forbid firms from rating securities they helped structure, ban employees from accepting more than $25 worth of gifts from companies issuing securities, and require the agencies to provide detailed information on both how they determine specific ratings and how those ratings hold up over time.

The rules are the first restrictions on the companies since ferocious criticism on Capitol Hill and Wall Street this year that the $5-billion-a-year industry betrayed the public by letting the desire for huge profits supersede the responsibility to provide unbiased appraisals for investors. The chiefs of three major ratings companies were grilled by lawmakers this fall after the release of embarrassing documents showing that they acknowledged the role conflicts of interest played in their businesses.

"What the SEC did today will certainly make the ratings process more transparent and objective and will help to slow some of the potential conflicts," said Ari Burstein, senior counsel at the Investment Company Institute, a national association of investment firms.

But the five-member SEC delayed action on other controversial proposals that some financial experts said would produce more sweeping change. One of the proposals they did not vote on would have eliminated rules requiring reliance on credit ratings. That measure drew heavy opposition from Wall Street.

Lawrence J. White, an economics professor at New York University, expressed disappointment that the SEC did not approve that proposal, which he said would increase competition among credit-rating companies and reduce the dominance of the three biggest firms: Standard & Poor's, Fitch Ratings and Moody's Investors Service.

"The commissioners missed an opportunity to really reform how the rating systems work," White said. "The actions they took are not the way to fix this problem."

Commissioner Kathleen L. Casey said she hoped the panel would soon take up that measure to end the oligopoly of the credit-rating agencies, though it could not be addressed until next year at the earliest.

Spokesmen for the credit-rating agencies said they backed the commission's general efforts, though they declined to comment yesterday on specific aspects of the proposals.

"We support the SEC's efforts to increase transparency and help restore confidence in the capital markets, and we'll continue to work with market participants to support these goals," said Edward Sweeney, a spokesman for Standard & Poor's.