Credit raters face more liability in Senate bill

By Rachelle Younglai

WASHINGTON (Reuters) - Credit rating agencies, accused of assigning top ratings to shoddy securities, would be exposed to greater liability under a wide-ranging financial services reform draft bill released by a leading U.S. senator.

The draft bill unveiled on Tuesday would give investors an easier way to sue firms like Moody's Corp (MCO.N), Standard & Poor's (MHP.N) and Fitch Ratings (LBCP.PA), if they knowingly and recklessly failed to investigate or obtain analysis from an independent source.

On the New York Stock Exchange, shares of Moody's fell 3.3 percent to $23.78 and McGraw Hill, the parent of Standard & Poor's, dropped 1.9 percent to $29.79.

The credit rater language in the legislation released by Senate Banking Committee Chairman Christopher Dodd, is similar to a House bill that would also open the door to more investor lawsuits. That makes it increasingly likely that the credit rating industry will face tougher regulation in any final financial regulatory overhaul that becomes law.

"To me it is all part of the politicking and greater regulatory scrutiny that these firms will be under," said Greg Peters, head of fixed-income research at Morgan Stanley in New York.

"You can't get rid of the rating agency model, but you can put tighter regulation around it to provide comfort," said Peters.

The Securities and Exchange Commission has already adopted numerous rules to improve credit rater disclosures and rein in potential conflicts of interest. For example, the SEC banned a rating firm's employee from both rating and determining a fee for the same product.

The draft Senate bill would order the SEC to write rules improving the methodologies credit rating agencies use to determine ratings. It would also require credit raters to submit annual internal control reports to the SEC.

The SEC's authority to revoke a credit rating agency's registration would be bolstered under the Senate bill and the agency would create an office dedicated to overseeing the credit raters.

A spokesman for Moody's said the firm shares the objective of policymakers in bringing increased transparency to the ratings process.

Calls to Standard and Poor's and Fitch were not immediately returned.

U.S. lawmakers have pushed for more oversight of credit raters after the companies failed to spot problems with debt linked to bad mortgages. The implosion of these securities helped contribute to the global financial crisis.

"In this crisis, instead of helping people better understand risk, (credit agencies) failed to warn people about risks hidden throughout layers of complex structures," Dodd said in a summary of his bill.

Dodd, a Connecticut Democrat, will shepherd the financial regulation bill through the Senate. It includes creation of a new agency to monitor risk in the financial system.

Both the full U.S. House and Senate have yet to vote on financial regulatory reform legislation. If they eventually approve bills, negotiators from both chambers must reconcile them into a final version before it can become law.