Franken: Get tough with credit raters

Sen. Al Franken (D-Minn.) wants the Securities and Exchange Commission (SEC) to know he is keeping a close eye on them, and he wants to see them get tough with credit rating agencies and their “culture of incompetence.”

Franken was joined on a conference call Thursday by several financial reform advocates to press regulators to rework a “fundamentally flawed” credit rating agency system that he said is rife with conflicts of interest.

{mosads}”That was what we saw during the lead-up to the financial meltdown,” he said on the call, hosted by Americans for Financial Reform. “This conflict-plagued system still persists … and the dangers still persist.”

Specifically, Franken is pushing for the implementation of an amendment to the Dodd-Frank financial reform law that would establish an independent board, overseen by the SEC, that would assign raters to provide initial ratings on a financial product. Such a board would prevent “ratings shopping,” wherein issuers of the product could seek out raters that would in turn hand out high ratings for the business, according to Franken.

In addition, the board could also consider the accuracy of several smaller raters, which struggle to compete with the three major raters — Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. If a smaller agency proves to be more accurate, the board could boost their stature and break up the “oligopoly” of the top raters, he said.

“Instead of pay to play, you switch to pay for performance,” he said.

Currently, the SEC is conducting a study, due in 2012, on how to eliminate conflicts of interest in ratings, as mandated by the amendment, which was sponsored by Franken and Sen. Roger Wicker (R-Miss.). If the SEC deems those conflicts as harmful to the public, the board or an alternative will come into being.

Now, Franken is staying on top of the SEC, urging them not to succumb to rating agency pressure for the status quo.

“What I’m really waiting for is for the study to be completed, and once the study is completed, to hold SEC’s feet to the fire,” he said.

In fact, Franken suggested that S&P’s recent downgrade of the nation’s credit rating — the first in its history — may have been the agency playing hardball with a government trying to regulate it.

“Someone could make a case that S&P is saying to the Treasury and SEC, if you implement the Franken amendment, watch out,” he said. “I think there might have been a relationship in that way.”

If the study does not yield some reform to address conflicts of interest, Franken said he would consider re-offering the amendment as stand-alone legislation.