Credit rating agencies are facing constructive criticism from the U.S. Securities and Exchange Commission (SEC). Recently, Moody’s Corp. (MCO) has been in the news for providing inaccurate information to the market regulator, the SEC, three years ago.

This news was disclosed by the rating agency last Friday, which exposed it to another controversy. The company has faced a series of allegations in 2009, and this trend doesn’t seem to be going away. According to the SEC, the rating agency misled them with some faulty information while applying for its license in 2007.

Not only this, but in 2008 the company acknowledged a computing error which translated into a faulty rating of the 11 fixed income investments having a total value of around $1.0 billion. The company disclosed that it has already responded to the SEC’s allegation and admitted that there were some errors in its license application procedure.

Other than Moody’s Investor Service, rating agencies such as Fitch, Standard & Poor’s Rating Services, and A.M. Best have recently come up against some strong criticism. This led to the Rating Accountability and Transparency Enhancement Act (RATE) of 2009. As per the new bill, the Securities and Exchange Commission (SEC) will be empowered to monitor the functioning of the rating agencies. Both retail and institutional investors will also have the option of conducting legal proceedings against them in case of improper updation of facts.

We believe that the more stringent review process would make things a bit more difficult for rating agencies. While they continue to be protected by the rights of freedom of speech and opinion, they will have to pay more attention to misrepresentation or improper representation of facts, because this is the area that could increase unwanted litigation.

On the other hand, we continue to believe that the business of credit rating will survive on its own merit, as it continues to be the official criterion used by many investors to define what debt they can or cannot buy. They are also very important for risk assessments by regulators.

While we believe that following the fundamental policy of providing free, fair and correct information to investors could be a challenge, the recent financial crisis is likely to increase the level of scrutiny, which could eliminate loopholes in the current system.
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