Credit rating firms to be scrutinized

The Securities and Exchange Commission will examine potential anti-competitive practices by credit rating companies as part of the agency’s new oversight of the industry, SEC Chairman Christopher Cox said Tuesday.

The credit rating industry has come under fire from U.S. lawmakers for failing to sufficiently highlight risks in complex financial instruments linked to sub-prime mortgages. Critics also say the firms were eager to give high ratings because they are typically paid by the companies whose securities they rate.

The SEC recently began examining credit rating companies under a 2006 law designed to foster competition in an industry dominated by three firms -- Moody’s Corp.; Standard & Poor’s, a unit of McGraw Hill Cos.; and Fitch, a unit of France’s Fimalac.

“The statute requires us to concern ourselves with anti-competitive practices and healthy competition in the industry,” Cox told reporters after speaking at a corporate governance conference.

Cox said one of the issues of interest to the SEC was “notching,” or the practice in which a credit-rating firm refuses to rate new issues unless it has already been hired to rate a substantial portion of certain classes of the issuer’s outstanding securities.

Erik Sirri, director of the SEC’s division of market regulation, said this year that the commission needed to study whether practices such as notching were truly anti-competitive in nature. Rating companies that engage in notching could be discouraged from doing so simply by having the SEC shed some light on the topic, Sirri said.