Pushing Back the SEC
Investors rely on credit rating companies to be their eyes and ears in the bond markets.
The companies have been around for a century, growing increasingly important to the U.S. and global financial systems. When corporations, banks or local governments want to borrow money from investors, they issue debt in the form of bonds. The rating companies determine the likelihood of default by assigning bonds a letter grade -- ranging from the safest triple-A to the junk bond status of C or lower.
Until the 1970s, the raters charged investors for their work. Then they shifted, assigning fees to the corporations that issue the bonds. Critics have claimed that the switch caused an inherent conflict of interest, giving the rating companies the incentive to please the bond issuers rather than the investors.
The idea that the companies needed more accountability gained traction at the SEC in the mid-1990s. But nearly every time the SEC has proposed credit rating regulation over the last 15 years, the companies have filed comments with the commission invoking the First Amendment defense, records show. In response, the SEC has often either abandoned or modified its attempts.
In 1997, when the SEC aimed to define the job of a credit rating agency, the general counsel for Moodys filed a comment objecting that among other things new regulation would Erode the First Amendment rights of all publishers of credit opinion. The SEC eventually abandoned the plan.
"You might come up with something that makes everybody happy, and we won't have to legislate.
Sen. Charles E. Schumer (D-N.Y.), 2007 Press Conference
In 2000, the SEC was pondering a crackdown on insider trading. If financial players selectively disclosed information to an interested party, the SEC wanted them to share the information publicly.
Moodys spoke up and asked for an exemption for the credit raters. The rating agency's role is analogous to that of a newspaper or magazine publisher, not to the role of a legal or financial advisor, the companys vice president said in a comment filed with the SEC.
The SEC approved the ruleand the exemption for rating companies.
