The Securities and Exchange Commission, recently given regulatory authority over the rating agencies, said Thursday that it is leading a series of wide-ranging reviews into the role rating agencies have played in the current mortgage industry meltdown. SEC chairman Christopher Cox said yesterday that the President’s Working Group on Financial Markets is examining the “the role of credit rating agencies in lending practices … and how securitization has changed the mortgage industry.” Speaking in testimony before the Senate Committee on Banking, Housing, and Urban Affairs, Cox said that the SEC may also be rethinking overall policy on the role rating agencies play in the secondary mortgage market. “We are also re-examining the wisdom of the legislative and regulatory provisions that have granted a central role to the rating agencies in our markets,” said Cox. “More than just providing the markets one view of the likelihood of default, the past several months have demonstrated the power of credit ratings to move markets, and their potential to create cascading effects in those markets.” Saying that there are clear “limitations” to using “credit ratings as a proxy for objective standards” of monitoring risk, Cox indicated that SEC staff are now exploring alternatives to current regulatory reliance on credit ratings. The admission of soul-searching anew at the SEC comes on top of an ongoing regulatory examination into the rating agencies’ role in the subprime mortgage crisis; that examination began last July, when the SEC gained formal authority to regulate the credit rating agencies. Cox said he expects a final report on the current investigative work to be complete by early summer. “Our examinations are focused on whether the rating agencies diverged from their stated methodologies and procedures for determining credit ratings in order to publish higher ratings,” Cox said. “They are also focusing on whether the rating agencies followed their stated procedures for managing conflicts of interest inherent in the business of determining credit ratings for residential mortgage-backed securities.” The SEC wants to improve disclosures and push greater transparency in market evaluation of any rating — such as those assigned to mortgage-backed securities — by requiring rating agencies to provide information regarding past performance and the accuracy of previously-assigned ratings. The SEC’s Division of Enforcement has more than three dozen subprime-related investigations currently underway, including inquiries into underwriting for various RMBS deals, as well as valuation strategies, Cox said.
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