Securities and Exchange Commission chairman Christopher Cox has directed staff to explore alternatives to relying on credit ratings in SEC rules "where feasible."

Since 1975, the SEC has used the credit ratings of nationally recognized statistical ratings organizations as proxies for objective standards to monitor the risk of investments held by regulated entities, including broker-dealers and money market funds. Other federal, state, and foreign regulators also have used ratings in this way.

But Cox told the Senate Banking Committee earlier this month that the "recent market disruptions" stemming from the rating downgrades of bond insurers exposed to the subprime market "highlight the limitations of this arrangement."

"I have also directed the staff to develop proposals for new, more detailed rules under the new Credit Rating Agency Reform Act that respond directly to the shortcomings we have seen through the subprime experience," Cox told committee members at the Feb. 14 hearing. "Among the proposals that the commission may consider as early as this spring are rules that would require credit rating agencies to make disclosures regarding past ratings, in a format that would improve the comparability of track records and promote competitive assessments of the accuracy of the agencies' past ratings. In addition, new rules could be aimed at enhancing investors understanding of important differences between ratings for municipal and corporate debt and for structured debt instruments."

Cox said the sensitivity to ratings is most pronounced in the municipal securities market, where "the lack of uniform, timely, and robust disclosure can leave investors with little more than a credit rating to rely on when making an investment decision." The problems stemming from the subprime mortgage crisis "reinforce" the need for improved disclosure in the market, said Cox, who proposed a series of muni initiatives last year.

Noting that the rating agencies have been criticized for giving overly high ratings to structured finance products, especially subprime residential mortgage-backed securities and collateralized debt obligations initially, Cox said the SEC is examining whether the rating agencies diverged from their stated methodologies and procedures in determining these ratings.

The commission also is looking into potential conflicts of interest "inherent in the business of determining credit ratings for residential mortgage-backed securities," Cox said, adding that he expects to receive preliminary reports from the examinations in the first part of the summer.

Further, the SEC's enforcement division has more than three dozen subprime-related investigations underway and has formed a working group to coordinate the commission's activities and any actions involving banking regulators, he told the lawmakers.

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