June 29, 2010 / 8:51 PM / in 7 years

UPDATE 1-S&P may cut Moody's rating on regulatory reform

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NEW YORK, June 29 (Reuters) - Standard & Poor's on Tuesday said it may cut its ratings on rival rating agency Moody's Investors Corp, saying U.S. financial reforms may lower margins and increase litigation costs at credit rating agencies.

S&P said it may cut Moody's short-term rating from A-1, the second-highest of seven ratings. Moody's is a unit of Moody's Corp (MCO.N).

U.S. lawmakers are close to finalizing legislation to overhaul the country's financial system, which includes making rating agencies, including Moody's and S&P, liable to be sued if they "recklessly" failed to review key information in developing a rating.

"While we believe it is likely that the new pleading standard will lead to an increase in litigation-related costs at Moody's, whether the new pleading standard would potentially increase the likelihood of successful litigation against Moody's will be determined in the future by the courts," S&P said.

Moody's has said it plans to adapt its business in an attempt to offset potential new litigation risks, S&P noted.

"Nevertheless, we believe that Moody's may face higher operating costs, lower margins, and increases in litigation-related event risk, which would likely increase its business risk," S&P said.

Federal regulators will also be required under the new laws to remove reference to ratings in their rules in an effort to reduce market reliance on the agencies.

Investor demand for ratings could be hurt if laws remove references to nationally recognized statistical rating organizations, S&P said. NRSROs are permitted by regulators to issue credit ratings.

Moody's, S&P and Fitch Ratings are the largest firms with the designation.

S&P said it deems the change as "unlikely to meaningfully impair Moody's business position over the near term" but will examine the long-term impact of the rule. (Reporting by Karen Brettell; Editing by Dan Grebler)

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