WASHINGTON -- Securities and Exchange Commissioner Richard Roberts warned last weekend that his own agency is encouraging an "unauthorized cartel" of rating agencies and said he would continue to push for formal regulation of the firms.
Mr. Roberts, speaking Saturday before the The Bond Club of Virginia, said the SEC has granted several U.S.-based rating agencies status as so-called "nationally recognized statistical rating organizations" on the basis of a narrow set of standards never intended to be the foundation for such status. The standards regulate the minimum net capital securities firms must have to operate.
At the same time, a number of foreign firms are clamoring for the so-called securities rating agency status even though there are no clear, comprehensive SEC standards on the books outlining what criteria they have to meet to achieve that rank, he said.
"It concerns me from a fairness standpoint," Mr. Roberts said. "It's become a trade issue. The NRSRO status is providing rating agencies with a competitive advantage -- a passport to business.
"All these other organizations want to be designated as NRSROs," he said. "But we don't have any published standards that they can point to. So as a matter of fairness, those organizations feel they have been disenfranchised unfairly."
The foreign firms "are talking to their state departments," said Mr. Roberts, who first called for more formal regulation of rating agencies in a set of speeches in early April. "Unless we do something it will become a trade issue that will be out of our hands," he said on Saturday.
The speech in April struck an immediate chord with the powerful chairman of the House Energy and Commerce Committee, Rep. John Dingell, D-Mich., who in late April asked the SEC to provide the committee with staff to help draft a bill to regulate rating firms.
All SEC members do not share Mr. Roberts's views.
SEC Chairman Richard Breeden last month said he opposes new legislation or regulations for rating agencies. "We've managed without any statute and without any SEC rules to develop the finest rating agency capability in the entire world.
Currently, the SEC has granted six domestic firms securities rating agency status. They are: Fitch Investors Service, Moody's Investors Service, Standard and Poor's Corp., Duff & Phelps Credit Rating Co., BankWatch, and IBCA.
Mr. Roberts also noted that Kemper Securities Group Inc. recently has created a rating system for unrated bonds and makes it available to customers. But the SEC would not recognize a firm as a securities rating agency if the firm does not make the rating publicly available, he said.
A number of requests are coming in from firms in foreign countries, including four in Japan, two in Canada, one in Mexico, and a handful in South America, Mr. Roberts said.
"I have no problem with the competence of the rating agencies. They, by and large, do an excellent job," Mr. Roberts said. His problem with rating agencies, he said, is that the SEC currently is operating an "unauthorized cartel which causes me a great deal of concern."
"Relying on rating agencies stinks. And I've said that about 80 times," Mr. Roberts said. "We're using them as a regulatory crutch when that is certainly not what the rating agencies intended or what the SEC's market regulation division intended."
"What kind of situation are we going to be in if we continue to rely on rating agency judgments and yet you have a number of [other] organizations that really don't exhibit the level of confidence that the NRSROs do today?"
Dean Pope, a partner in the Richmond-based bond counsel firm of Hunton & Williams, asked Mr. Roberts whether the SEC could modify those rules that rely on rating agency determinations instead of creating a separate set of standards.
Mr. Roberts said, "It's really too late to pull them out" and added that as many as 10 sets of rules refer to rating agency determinations.
"What you have is a house of cards," he said. "You've got this reliance on rating agencies that's so imbedded in our system that it is, in our opinion, too late to pull it out."
Mr. Pope warned, however, that establishing formal regulations for rating agencies could backfire because the market could become even more dependent on them than they are now.
Mr. Roberts repeated his call for broader standards and registration of rating agencies during a discussion of his recent call for written suitability standards for nonrated and conduit bonds.
He told municipal bond dealers in Richmond he is sensitive about linking a rule to the existence or nonexistence of a rating in the absence of clear criteria for who qualified as a securities rating agency. But, given the critical importance of rating agencies in the municipal market, he said ratings may be the best way to focus on troubled bonds.
"There's no doubt in my mind that rating agencies could rate those issues if they wanted to," Mr. Roberts said, referring to nonrated bonds. "If they can handle the complicated structured finances we're faced with today and rate those successfully, they can also rate these."
