Federal regulators on Wednesday proposed new rules that could reduce the importance of Wall Street's credit rating industry, the latest government response to the financial crisis set off by mortgage securities.
At the same time, the Securities and Exchange Commission looked to ease barriers to U.S. investors trading with foreign brokerage firms _ a move that Wall Street has pushed for, saying it would reduce costs for investors trading stocks on foreign exchanges. The proposal would cut the required amount of investments to qualify to deal directly with foreign brokerages to $25 million from $100 million.
SEC officials said the proposed change reflected the growing globalization of securities markets. A current requirement that foreign brokers soliciting business in overseas stocks with U.S. investors be "chaperoned" by a domestic brokerage participating in tandem has been unwieldy, they said.
The votes were 3-0 at a public meeting to propose and open to public comment for 60 days the rule changes related to the role of credit rating agencies and to U.S. investors trading overseas. The new rules could be formally adopted sometime afterward.
The three major rating agencies _ Standard & Poor's, Moody's Investors Service and Fitch Ratings _ have been widely criticized for failing to identify risks in subprime mortgage investments that touched off the credit-market crisis. The SEC earlier this month proposed new rules that would require ratings of complex securities, such as those underpinned by mortgages or student loans, to be distinguished from those for corporate or municipal bonds.
The SEC on Wednesday tentatively adopted other rule changes that would, among other things, make it possible for money-market funds to buy short-term debt without the current requirement that it be highly rated by the agencies. Managers of money-market funds, a multitrillion-dollar business, still would be required to make independent credit analyses before buying securities. Ratings by the agencies could be a factor used in those analyses.
The proposed rules also could reduce the importance of credit ratings in determining investment banks' capital requirements.
S&P, Moody's and Fitch said Wednesday they supported the SEC's broad goals in bringing changes to the financial markets, but mostly reserved judgment on the new proposal until they had reviewed it in depth.
The events unfolding from the subprime mortgage crisis "have had a profound effect on our economy and our markets, and they have galvanized regulators and policymakers," SEC Chairman Christopher Cox said before the vote.
The ratings agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company's ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.
The SEC has been seeking to make the ratings business more transparent while also encouraging new firms to enter. Critics of the rating agencies say the SEC's action Wednesday will make it easier for investors to discover the best way of evaluating credit risk.
"Fitch concurs with the goal of having market participants enhance their own assessments of credit risk," David Weinfurter, a managing director of the New York-based company, wrote in an e-mail. "The ratings and research of credit rating agencies are integral and reliable components of the global risk framework and will continue to be widely used by market participants."
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