Rating Agencies on Watch
Green, Paula L., Global Finance
With a global reach but only three primary players, the powerful credit-rating business may finally be getting an overhaul and some new competitors.
By the end of March the US Securities and Exchange Commission will put out a 'concept release' that will investigate everything from conflicts of interest between the agencies and the corporations whose debt they rate to the red tape that now hinders the entry of new players. The SEC's next step will be absorbing comments on the concept release and then issuing proposed rules that will address the issues affecting the controversial credit-rating business.
"Credit rating agencies are supposed to be unbiased. But the dynamics of the situation cut against full objectivity," says Raphael Russo, an attorney and partner in the corporate department at Paul,Weiss, Rifkind,Wharton & Garrison in New York. Russo was referring to the fact that the corporations pay for the credit ratings provided by the credit agencies. "There's also a limited amount of companies that do it," he notes.
The domination of the industry by three agencies-Moody's Investors Service, Standard & Poor's and Fitch Ratings (which, while based in the United States, is owned by the French financial group Fimalac)-has generated increasing controversy in the financial industry over the past year. Critics argue that the ratings agencies did not adequately warn investors of the impending failures of Enron, WorldCom and other companies that rocked international financial markets.They argue that increased competition could keep everybody on their toes.
One section of the Sarbanes-Oxley Act-the US Congress' response to the financial scandals-directs the SEC to look at the role and function of credit rating agencies in the operation of the securities markets. The SEC report, released in late January, coincided with a review of credit rating agencies already under way at the commission.
One issue now being investigated by the SEC is expanding the number of companies allowed to serve as nationally recognized statistical rating organizations, also known as NRSROs. …