With that authority, however, the SEC would automatically have the ability to make regular or spot inspections at any time and require agencies to turn over documents even if an investigation is not underway. Although probably not as demanding as some in the market would want, any action by the SEC would be historic since, as these same critics readily point out, the agencies have operated from their inception unfettered, despite their pivotal role in the marketplace.

No doubt, though, there will be some carping if the regulatory plans do not go far enough in addressing the black eye the agencies suffered for not being quick to uncover some of the largest corporate frauds in recent years. Already, their corporate customers are agitating for action.

In April, an international alliance of treasury and finance associations–made up of the U.S.-based Association for Financial Professionals (AFP), the United Kingdom's Association of Corporate Treasurers (ACT) and France's Association Fran?aise des Tr?soriers d'Entreprise (AFTE)–issued a draft code of standard practice recommendations. Although non-binding, the new standards are meant to restore confidence in the credit rating process by creating a single global proposal for improving rating industry practices, according to the coalition. "This is an issue that has a global footprint," says Jim Kaitz, president and CEO of AFP. "The fact is you have essentially three credit rating agencies that are delivering ratings, and it is not clear what their methodology is or who the regulator is."

The draft report calls for greater regulatory scrutiny of rating agency methods and also recommends that transparency be increased in terms of their policies and procedures. Among its recommendations, the report says that regulators should set simple but stringent criteria that the agencies must meet in order to be recognized or approved. Specifically, the report suggested that the agencies be subject to periodic reviews by regulators and they should be required to produce documentation of internal controls they follow to guard against conflicts of interest and anticompetitive practices.

It is unclear what impact the draft report will have on the rating process, although some of the suggestions, such as having agencies publish their methodologies and giving issuers a preview of a rating change prior to its release to the public, are already widely practiced by the industry. "The SEC needs to get involved here and at least clarify how one becomes a rating agency and prescribe an audit function [over the agencies]," says Kaitz. He adds that, short of SEC action, he hopes ideas in the report will be included in all contracts between issuers and the credit ratings agencies.

The rating agencies themselves are in the midst of reviewing the draft release. "It was a thoughtful effort," says Frances Laserson, vice president and manager of corporate communications at Moody's Investors Service. "This document comes from a very important class of users of ratings. We think the report contributes to the meaningful dialogue about market efficiency and investor protection."

The draft report is open for public comment, and a final set of guidelines is expected later in the year. By that time, the SEC may be well on its way to establishing the regulatory framework that many have called for.

–John Labate