The world's major credit raters voiced strong opposition in a House hearing yesterday to proposed legislation that would impose the first federal oversight of the industry, calling it unconstitutional, intrusive and a potential threat to the stability of financial markets.
The hearing, by the House Financial Services Committee's subcommittee on capital markets, insurance and government-sponsored enterprises, centered on a bill that would require rating agencies to open their books to inspection and protect against conflicts of interest, anti-competitive practices and the misuse of confidential information.
There is no formal regulation of the raters, who hand out letter grades to companies and countries that want to borrow money by issuing bonds. But the Securities and Exchange Commission in 1975 created an undefined national designation called Nationally Recognized Statistical Rating Organizations, or NRSROs, which it has given to five firms and which investors have come to view as the government's stamp of approval. Since then, the SEC has studied the issue but taken little action, and two firms now dominate the industry -- Moody's Investors Service and Standard & Poor's -- with more than 80 percent market share.
Under the legislation, the national designation would be removed; instead, the SEC would simply register firms that meet basic requirements, such as having been in business for at least three years.
Rita M. Bolger, S&P's managing director and associate general counsel, called the bill "intrusive regulation" that could have "disruptive effects" on the financial markets. The SEC's national designation is already embedded in many laws and used as an investment guide by mutual funds and other major institutions.
Bolger also said the bill would "violate the First Amendment" because "rating agencies are members of the financial press" and are thus accorded the freedom to express their opinions.
Subcommittee Chairman Richard H. Baker (R-La.), the bill's co-sponsor, called that a "specious First Amendment argument" because the credit raters are less financial journalists than powerful gatekeepers in the financial markets.
Moody's spokeswoman Frances G. Laserson said lawmakers should be patient while the raters continue negotiating with the SEC a "voluntary framework" to oversee their own codes of conduct. The SEC has not taken a position on legislation.
Baker said he hopes to move to reform the industry by year-end. "The SEC has not acted," he said. "For 30 years, it's not acted."