SEC Adds A.M. Best to Official Rater List

The Securities and Exchange Commission on Thursday took steps to boost competition in the corporate credit-rating business, which some critics say has been fraught with conflicts of interest.

But the agency indicated that it would need specific authority from Congress to police the rating industry.

The SEC said it added a fifth firm -- 105-year-old A.M. Best Co. of Oldwick, N.J. -- to its list of nationally recognized rating organizations.

That official status will allow A.M. Best to compete with the four other firms on the list: Dominion Bond Rating Service Ltd.; Fitch Ratings; Moody’s Investors Service Inc.; and Standard & Poor’s.

Credit-rating firms grade the credit-worthiness of bonds issued by companies and governments. The rating firms wield substantial power because the grades they give bonds are a key factor in determining the interest rates bond issuers must pay to borrow.

Critics say the industry has been too exclusive a club, and that it is compromised by its basic structure, in which borrowers pay the firms to rate their debt.

Some lawmakers also say the industry has failed in its watchdog role because it didn’t predict the collapse of Enron Corp. and other fraud-ridden corporate giants in recent years.

In another move to open the business to more competitors, the SEC voted unanimously to propose clarifying its requirements for what the official rating organization designation means and how other firms can obtain it.

Several small rating companies have sought the official recognition in years past, but have complained that it was never clear what exactly was required to get it.

“Today’s [SEC] action is a modest step in the right direction, but it is not enough,” said Jim Kaitz, president of the Assn. of Financial Professionals, a Maryland-based group representing thousands of corporate financial officers.

Kaitz’s group issued a survey in October showing that more than half of its members wanted more regulation of credit raters.

But SEC General Counsel Giovanni Prezioso told the agency’s commissioners that “securities laws don’t contain and prescribe an explicit regulatory regime” for rating firms.

“Clarifying legislation should be sought from Congress,” he said.

SEC Commissioner Harvey Goldschmid said supervision of the industry was inadequate, but he agreed with Prezioso that “the SEC needs explicit regulatory oversight authority from Congress.”

Some critics of the SEC’s present system of approved rating firms advocate scrapping it entirely and allowing the marketplace to decide which credit raters are doing a good job and which are not.

There are about 150 credit-rating companies worldwide, many of them specialists in specific industries. Many say they can’t break into the business on a national scale in the United States without the SEC’s official designation.