Richard Roberts, a member of the Securities and Exchange Commission, believes the integrity of the municipal bond market needs strengthening, and he wants to step up regulation of bond rating services. It's a bad idea.

From our perspective, we want to keep the nationally recognized statistical rating organizations as free from government supervision as possible. The securities marketplace must determine whether the rating agencies' opinions are worth anything, not the federal bureaucracy.

Fortunately, there are wiser heads on the commission. Chairman Richard Breeden suggested recently that the agency adhere to the maxim, "If it ain't broke, don't fix it." When something seems to be working as well as the rating agencies seem to be working, he said, "We ought not start getting pointy-headed bureaucrats trying to tell them how to do it when they've already figured out how to do it and they're doing just fine."

Commissioner J. Carter Beese agreed. "I don't see a demonstrated need at this time for increased regulation in the area of NRSROs," he said at a meeting of the commission last month. "I have had 14 years of direct experience in the market. I relied heavily on those agencies, and I think they have served the market quite well."

Back in April when he spoke at a Public Securities Association seminar, Mr. Roberts called for increased regulation of rating agencies, and he tackled the subject again at a gathering of the Bond Club of Virginia on June 13. "Rating agencies remain the only participants in the securities market to be largely unregulated," he complained in a sort of regulator's lament, but he didn't cite abuses and he didn't spell out specific rules he thought were needed.

Mr. Roberts is concerned about protecting retail investors from "inappropriate" purchases of high-risk municipal bonds, and he wants bond dealers who recommend muni junk bonds to sell them only to "suitable" investors and to put it in writing.

Which brings him to the rating agencies: "I preliminarily believe that ratings may provide the best way to identify securities likely to raise investor protection concerns," he told the Virginia Bond Club, adding, "I am sensitive to the difficulties in linking regulatory requirements to such ratings in the absence of clearly defined criteria for qualification as an NRSRO.

If the right steps are taken, fewer bonds sold by shaky nursing homes or raw-land developers will be fobbed off on gullible widows, his argument goes. But that's not the answer. Just apply the suitability rules now on the books -- and leave the raters alone.

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