Prompted “in part by the Enron episode,” SEC Commissioner Isaac Hunt Jr. told Congress last week that the agency intends to begin an inquiry into whether it should regulate credit rating companies, as well as explore the need for greater competition within that industry.

A key question is whether “sufficient competition” currently exists within the industry, Hunt said during a Senate Governmental Affairs hearing exploring the role of credit rating agencies in the collapse of Enron Corp. He believes that more credit-rating agencies — beyond Standard & Poor’s (S&P), Moody’s Investors Services and Fitch Ratings — may be needed.

Justifying the need for possible oversight by the Securities and Exchange Commission, he noted that the rating agencies “perform an ever more important role” in the markets, wielding significant power and affecting billions of dollars. Hunt said the agency currently reviews credit agencies’ internal controls and records, but “we do not second guess their work.”

Hunt indicated that the SEC currently has enough authority to initiate some of the reforms “through rulemaking,” but he said the agency may require additional authority from Congress.

The credit agencies operate in an “oligopolistic” environment, and have very close ties with corporate clients, said Jonathan Macey, a professor at Cornell Law School. Enron, for example, paid Moody’s up to $2 million a year to maintain its credit rating, he noted.

There is a “lack of accountability” on the part of the rating agencies, as well as a “lack of vigorous pursuit” of irregular or possibly illegal activity by their clients, Macey said. The agencies rely too much on their corporate clients for information.

He called on the SEC to require the credit agencies to disclose the documentation and information on which they base their ratings of companies. The current process for determining company ratings was described as “very opaque.”

The recurring “refrain” of the three credit agencies that their corporate clients are unwilling to disclose critical information “does not hold water,” said Glenn Reynolds, CEO of CreditSights Inc. The “depth and vigor of their due diligence” is questionable at best, he noted.

The agencies are a “very good set of eyes and ears” to obtain information on corporate clients, given they have access “day in and day out” to critical information.

In a letter to the House Energy and Commerce Committee, S&P President Leo C. O’Neill insisted that Enron concealed its “true financial obligations” from Standard & Poor’s, which he said had a “significant and misleading effect on our ongoing review of its creditworthiness.”

S&P “relies on the issuer and its counsel, accountants and other experts for the accuracy and completeness of the information submitted in connection with the rating process,” he said. “We are not auditors.”

S&P has an “unambiguous understanding” with its corporate clients that requires them to “furnish complete, timely and reliable information and to update that information on an ongoing basis,” O’Neill wrote, adding that Enron failed on this score.

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