June 16, 2010 / 9:27 PM / 9 years ago

UPDATE 1-U.S. to hike credit raters liability metric

* SEC must address raters conflicts of interests

* Franken credit agency rule could still prevail in 2 yrs

(Adds lawmaker comments, context with Senate proposal)

By Kim Dixon and Rachelle Younglai

WASHINGTON, June 16 (Reuters) - Investors could sue credit rating agencies that “recklessly” failed to review key information in developing a rating, under final language for legislation agreed upon by U.S. lawmakers on Wednesday.

Negotiators working on revamping financial regulation agreed credit agencies would be held liable if they knowingly and recklessly mislead investors.

Policymakers are trying to hold credit agencies more accountable after they assigned top ratings to subprime mortgage securities that eventually plunged in value when the U.S. housing market collapsed.

“Clearly credit ratings agencies overrated substantial amounts of paper,” House Financial Services Committee Chairman Barney Frank, a Democrat, said at a conference committee to hash out the final bill to revamp the financial system.

A select group of lawmakers are working through the details of a landmark overhaul of the financial regulatory structure, with a plan to have a bill on President Barack Obama’s desk by July 4.

The lawmakers chose to make it easier for investors to sue with a “knowing and reckless” standard, rejecting a House offer to raise the bar and make the liability standard “gross negligence”

The ratings agencies argue that a lowered liability standard would single them out unfairly and could lead to more frivolous lawsuits.

Republicans argued it was unfair to single out the agencies when so many other actors missed signs of the pending crisis.

“As we increase the liability standards of these credit rating agencies, it is important to note that in many respects federal policymakers and regulators made exactly the same mistakes,” Republican Representative Jeb Hensarling said during the debate.

The lawmakers also agreed on Wednesday to require the Securities and Exchange Commission to address the inherent conflicts of interests at the largest credit agencies Standard & Poor’s MHP.N, Moody’s Corp (MCO.N) and Fitch Ratings LBCP.PA.

The Big Three rating agencies are paid by the issuers whose debt they rate. Under a measure proposed by Democratic Senator Al Franken, a credit rating agency board would have been created to match credit agencies with debt issuers.

Lawmakers agreed to require the SEC to address the conflicts of interests and mandated that the Franken provision be implemented if the regulator did not find an alternative after a two-year study of the issue.

“We shouldn’t be surprised (at) what happens when we have the umpire selected by the home team,” said Democratic Representative Brad Sherman, referring to the conflict that may exist when the issuer pays the rating agency to rate products.

Additional reporting by Elinor Comlay in New York; Editing by Andrew Hay

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