U.S. SEC official: Toughen credit agency oversight

WASHINGTON Tue Mar 3, 2009 12:18am GMT

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WASHINGTON (Reuters) - Regulators must do more to limit conflicts of interest at credit rating agencies created when an issuer or bank pays for a rating, a member of the U.S. Securities and Exchange Commission said on Monday.

The SEC adopted rules in December that prohibit credit raters from rating their own work and ban employees who help determine a credit rating from negotiating any fees.

However, Elisse Walter, one of five SEC commissioners who makes decisions on federal securities rules, said that isn't enough.

"We need to consider alternatives to the issuer-paid model," Walter said at the Institute of International Bankers conference in Washington. "You could have all publicly held companies in the United States pay into that pool."

Walter suggested creating a revenue pool to pay credit raters, which include Moody's Corp (MCO.N), McGraw-Hill Cos Inc's MHP.N Standard & Poor's and Fimalac SA's (LBCP.PA) Fitch Ratings.

Critics say the credit raters contributed to the global credit crisis by giving top ratings to mortgage-backed securities that later deteriorated.

The existing way the credit rating industry operates "is a clear conflict of interest," Walter told reporters on the sidelines of the conference. "There either needs to be controls put in that will control for it, or we need to try a different model."

SEC, CFTC MERGED?

On another high-profile issue, Walter said the SEC should be merged with the Commodity Futures Trading Commission to provide more comprehensive authority and real time information as markets become highly integrated.

"Neither agency should be swallowed into the other. It should be a merger where the different approaches are both used and different voices are heard," she told reporters.

The SEC and CFTC have agreements to share information and work together but Walter said this was not enough.

"When you have one set of information flowing into one body that has to share it with the other one... there are delays in terms of really being able to react in real time," she said.

As Congress considers U.S. financial regulation reforms this year, Walter warned against limiting the SEC's functions solely to that of a business conduct regulator. The agency would not be able to protect investors properly if it was stripped of authority over the markets, she said.

(Reporting by Rachelle Younglai; editing by Jeffrey Benkoe, Gary Hill)