UPDATE 2-US regulators urged to probe Moody's reported error

(New throughout; adds SEC chairman, securities expert, Moody's, lawmaker statements)

By Karey Wutkowski and John Poirier

WASHINGTON, May 21 (Reuters) - U.S. lawmakers on Wednesday urged the Securities and Exchange Commission to investigate a reported coding error that may have led Moody's Corp to incorrectly assign triple-A ratings to some complex European debt products.

Sen. Charles Schumer, a Democrat from New York, and Rep. Paul Kanjorski, a Pennsylvania Democrat, said the matter deserves close scrutiny, especially if U.S. investors were impacted.

"The news today about Moody's greatly concerns me," Kanjorski, chairman of a House subcommittee on capital markets, said in a statement to Reuters. "Moody's must come forward immediately to explain its actions and clarify what happened."

The Financial Times said Moody's did not downgrade the ratings after discovering the error in 2007, raising questions about whether investors and clients were informed in a timely manner.

The SEC said on Wednesday it was unclear if it had jurisdiction in the Moody's matter.

"It is my understanding that reports thus far concern activities in Europe, over which the SEC may or may not have jurisdiction," SEC Chairman Christopher Cox told reporters after a commission meeting.

Regulators in the UK and the European Union have not adopted any formal oversight of the ratings agencies, leaving them to an industry code of conduct.

When asked about the SEC's reaction to the reported computer error by Moody's, Cox said credit rating agencies' compliance with their internal procedures and related issues are "all regulatory concerns" for the SEC.

Shares of Moody's fell by as much as 17 percent on Wednesday after the Financial Times reported Moody's had wrongly assigned the triple-A ratings on so-called constant proportion debt obligations, or CPDOs. The shares closed down almost 16 percent at $36.91 on the New York Stock Exchange.

Moody's said in a statement that it realizes the seriousness of the questions raised in the Financial Times article and has initiated a thorough external review of its European CPDO ratings process.

It said it rated 44 European CPDO tranches, representing about $4 billion in rated securities, but did not indicate who invested in the securities.

Kanjorski, whose subcommittee is studying how credit-rating practices contributed to the subprime mortgage crisis, said if the error affected U.S. investors, the SEC should examine the situation.

"I also want to know when the commission learned of these problems and whether it might have affected Moody's application under the 2006 law for continued designation as a Nationally Recognized Statistical Rating Organization (NRSRO)," he said.

Schumer said in a letter to Cox that the SEC should fully investigate the matter and impose sanctions on Moody's if it can verify the ratings agency covered up the error for a year after the company officials learned of it.

The SEC, which is responsible for ensuring that credit ratings agencies make adequate disclosures, is separately considering whether additional industry regulations are needed.

Although the SEC does not have authority over how a credit rating agencies assigns its ratings, the agency could investigate if there was a misrepresentation of a rating, said James Cox, a securities law professor at Duke University.

Cox, who is not related to the SEC chairman, said the agency could then prescribe a remedy to help ensure such a glitch does not occur again.

He also said the SEC would have clear authority to investigate any incorrect ratings at Moody's if U.S. investors were affected. "It's imaginable that the hardware, or more particularly the software program, that was being used offshore would be the same software and hardware program being used in the United States," James Cox said.

IN THE SPOTLIGHT

Credit raters are under scrutiny by U.S. regulators and lawmakers over their role in the U.S. subprime mortgage crisis. Critics say the firms sometimes assigned too-high ratings to bonds backed by poor-quality mortgages.

The SEC has spent months examining the credit rating industry and plans to propose new rules for them in June, the SEC's Cox told reporters on Wednesday.

Last month, Cox told a Senate hearing that the agency is examining public disclosures by credit raters on structured finance products such as mortgage-backed securities, and how the firms managed conflicts of interest. New regulations could include requiring better disclosure of past ratings, limiting conflicts of interest and requiring rating agencies to differentiate between corporate bonds and more complex structured finance products, he said.

Last year the SEC gained additional oversight powers over the credit raters through a 2006 law aimed at increasing competition in the industry. (Additional reporting by Walden Siew in New York) (Editing by Dan Grebler)