By Karey Wutkowski and Rachelle Younglai
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission's review of the credit rating agencies is in process and agency staff may make some recommendations on how to improve disclosure and conflicts of interest as early as June or July, a senior SEC official said on Tuesday.
Last year, the investor protection agency gained oversight of the credit rating agencies such as Moody's Corp (MCO.N: Quote, Profile, Research, Stock Buzz), Standard & Poor's and Fitch, which have been blasted for not responding quickly enough to the deteriorating conditions in the subprime mortgage market.
The SEC is charged with ensuring credit rating agencies follow their stated procedures for managing conflicts of interest as well as ensuring they make the adequate disclosures. The agency does not have jurisdiction over how the firms come up with their ratings.
"We may engage in some rulemaking, such as better disclosure about rating performance, better conflicts (of interest) management," Erik Sirri, head of the SEC's division of trading and markets, said on Tuesday at the Reuters Regulatory Summit here.
Sirri said the agency is looking at issues around collateralized debt obligations (CDOs) and residential mortgage-backed securities, specifically whether the agencies followed their own procedures for rating the products.
Rating firms have been accused of conducting weak analyses and granting higher ratings because they are paid by the companies or issuers whose securities they rate. Critics also blame them for failing to highlight risks secured by pools of mortgages, including subprime mortgages for U.S. borrowers with tainted credit.
Reacting to the credit turmoil, Moody's said this week it may change how it rates thousands of mortgage and other structured products. The firm said it was considering using numeric ratings on structured debt, instead of the letter grades it now uses for structured as well as corporate debt. It may also add warning labels to flag which structured debt might have particularly volatile ratings.
Sirri said this was one of many ideas that have been floated in the industry but he did not fully endorse it.
"Investors would be alerted to the fact that it's not your mother's triple A bond," he said. Sirri noted that such a change could have a broad impact, requiring institutional investors to rewrite their investment guidelines.
FDIC Chairman Sheila Bair, who spoke at the summit earlier in the day, said the Moody's proposal shows that the agency "has been doing some good thinking." But she said the industry needs greater transparency about the quality of the assets ultimately underlying the products they're rating.
"They don't even look at the underlying quality of the assets," Bair said at the Reuters Summit.
Credit rating agencies are just one of many groups that has been blamed in the subprime fallout. Banks, regulators and mortgage lenders have also come under fire for their role in the crisis that has rocked markets and forced thousands of homeowners into foreclosure.
"There's a lot of blame here, and I'm not saying credit rating agencies aren't culpable ... but I think investors have to shoulder their fair share of blame here," said Sirri. "A lot of investors did not do their due diligence."
Standard & Poor's is a unit of McGraw Hill Cos Inc (MHP.N: Quote, Profile, Research, Stock Buzz) and Fitch is a unit of France's Fimalac SA (LBCP.PA: Quote, Profile, Research, Stock Buzz).
(Editing by Richard Chang)
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