September 15, 2009 / 9:10 PM / 10 years ago

U.S. SEC mulls stricter rules for credit agencies

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission may force banks to share data used to rate bonds with all credit rating agencies, reducing the risk that investors will buy securities with inflated ratings, two people familiar with the regulator’s thinking said.

Data would not be disclosed publicly, but would be shared in an attempt to generate unsolicited ratings for their products, one source said.

The SEC is scheduled to meet on Thursday to discuss rules to improve oversight of the credit rating industry, long dominated by Moody’s Corp’s Moody’s Investors Service, McGraw-Hill Cos’ Standard & Poor’s, and Fimalac SA’s Fitch Ratings.

Global policymakers are trying to make credit agencies more accountable after the firms assigned top ratings to products linked to shoddy mortgages that later lost much of their value, costing investors trillions of dollars.

The SEC may require banks and other issuers to disclose preliminary ratings, to prevent them from shopping around for the better ratings, the people familiar said. They requested anonymity because the discussions are private.

The SEC may also require all credit agencies to reveal more information about past ratings so investors could compare their relative performance, with perhaps a one- or two-year time lag, the people said.

This requirement would apply regardless whether agencies are paid by issuers or by investors, they said.

The proposals remain in flex as the five SEC commissioners debate the scope of any changes.

The regulator is expected to issue a general discussion paper that questions whether credit agencies should be regulated as “experts” under securities law, and thus subject to tougher standards of liability.

Rating agencies are exempt from such regulation. In contrast, auditors are considered experts, and are more easily sued over their findings.

The SEC is also expected to consider removing references to credit ratings in some of its rules — a move that would force Wall Street to do more due diligence. This measure is supported by the Obama administration.

The SEC has already proposed removing references to the ratings in most of its rules. However, the powerful mutual fund industry has trampled over that plan because it would scrap a requirement that money market funds hold investment-grade securities.

The agency will not consider removing that particular reference for money market funds at its Thursday meeting.

SEC spokesman John Nester said: “The commission will consider measures to strengthen oversight of credit rating agencies and improve the quality of ratings through greater transparency and accountability.”

At the same meeting, the SEC is expected to propose a ban on flash trades — or buy and sell orders that exchanges send to a specific group of participants before revealing them publicly.

Reporting by Rachelle Younglai; Editing by Andrea Ricci, Leslie Gevirtz and Matthew Lewis

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