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S&P Warns Credit-Rating Proposal Could Create New Conflicts

Source: WSJ

Posted on 14 May 2013 by Neilson

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S&PStandard & Poor's Ratings Services President Douglas Peterson said Tuesday that a proposal to upend the credit-rating firms' business model would create new conflicts of interest and disrupt financial markets.

Mr. Peterson told Securities and Exchange Commission commissioners, debt-issuers and others credit-rating industry participants at a round table discussion hosted by the SEC on Tuesday that regulators and lawmakers had made "tremendous progress" in increasing oversight of the credit-rating industry.

The 2010 Dodd-Frank financial-overhaul law requires the SEC to create a board that would assign a rating firm to evaluate structured-finance deals or come up with another option to eliminate conflicts.

"The proposed system could create new conflicts," Mr. Peterson said at the first of three panels at the all-day round table in Washington. "The system could be costly and slow to implement, causing uncertainty in the marketplace."

S&P, a unit of McGraw Hill Financial, Inc., is the world's largest credit-rating firm.

Sen. Al Franken (D., Minn.) proposed the legislation, which is known as the Franken Amendment. Credit-rating firms like S&P and Moody's Corp.'s  Moody's Investors Service are paid by issuers to rate their bonds, which lawmakers and investors have said is a conflict of interest.

Mr. Franken defended his proposal Tuesday to attendees at the round table, including SEC commissioners and SEC Chairman Mary Jo White. He also called on the agency to make changes to the credit-rating industry.

"My plea today is that you take action," Mr. Franken said. "Millions of Americans lost their jobs because the credit rating agencies didn't do their jobs," he said.

The SEC has faced criticism from Mr. Franken and others for the lack of substantial changes to the credit-rating industry since the passage of the Dodd-Frank legislation in 2010.

The agency published a report in December-six months late-that was widely expected to announce regulatory changes. Instead, the report proposed more discussion and the convening of a round table.

The SEC is "required to do something to protect the American people from a repeat of what happened five years ago," Mr. Franken said.

The ratings amendment was also sponsored by Sen. Roger Wicker (R., Miss.). Despite "gridlock in Washington," Mr. Wicker said Tuesday, Democrats and Republicans "agree" on the need for changes to the credit-rating industry.

SEC Chairman Ms. White said the round table was being held so that different market participants could weigh in on the best way to regulate the credit-rating industry.

"Today is the day for that discussion," Ms. White said.

There was no consensus among the nine speakers in the first panel discussion on the merits of the Franken Amendment. Some speakers said they supported it as a way to clamp down on conflicts of interest. Other panelists said it would imply a government stamp of approval for ratings at time that federal agencies are trying to reduce reliance on credit ratings.

Kroll Bond Rating Agency Inc. Chairman and Chief Executive Jules Kroll said Tuesday that he had initially tried to have investors, rather than issuers, pay for ratings. But investors didn't want to pay, he said.

Mr. Kroll called on the SEC to ask investors to remove investment guidelines that require institutions to purchase bonds rated by the major rating firms.

Twenty-six experts were scheduled to speak on Tuesday.