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European regulator probes rating agencies

The European Commission has announced an investigation into the regulation of rating agencies, calling for evidence that could lead to legislation on the issue.

The issue has come to the fore in recent years following the collapse of companies such as Enron, Worldcom and Parmalat, all of which were rated as investment grade by at least one of the three major agencies at the time of their downfall.

The EC mandated the Committee of European Securities Regulators (Cesr), which brings together national regulators from across the EU, to report back on the issue by April 2005. Cesr was told to cooperate with the Securities and Exchange Commission (SEC) in the US and the International Organization of Securities Commission (Iosco), both of which have been conducting studies since 2003.

At a recent meeting of the International Bar Association, however, Barbara Sullivan of Moody?s Investors Service argued that investors have unrealistic expectations. ?Credit rating agencies are not systematically designed to uncover fraud,? she said. ?They are not equipped to audit the work of auditors.?

The agencies are also under scrutiny over the apparent conflicts of interest that result from most of their income coming from the companies they rate, and from the advisory services offered by the agencies.

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