Jeff Diermeier, president and ceo of the
CFA Institute, believes the alleged conflicts of interest in credit ratings agencies--currently under review by the
Securities and Exchange Commission--are similar to those surrounding paid-for research. In testimony he will give before the Senate Banking Committee on Tuesday, Diermeier will note the CFA's support for self-regulation, but will add that the credit rating agencies "have been reluctant to embrace any type of regulation over the services they provide." Credit rating agencies "should be held to the highest standards of transparency, disclosure and professional conduct. Instead, there are no standards. There is no oversight." He suggests that the CFA best practices guidelines for managing relationships between corporations and financial analysts be used to cure these conflicts. Paid-for research companies are compensated for providing research on under-covered companies, by those same companies. Credit rating agencies are paid by debt issuers for evaluation and ratings on their bonds and other debt. It is a $2.5 billion industry.
Credit rating agencies have come under scrutiny since they were slow to spot the largest financial collapses of the decade--
Enron Corp. and
WorldCom Inc. But dissatisfaction has snowballed and there are bills before both the House and Senate to increase regulation. Credit ratings agencies are dominated by the big three:
Standard & Poor's,
Moody's Corp. and
Fitch Ratings. The ratings agencies officials have said they believe that their internal firewalls and safeguards are enough to protect investors from any conflicts of interest.
