The three main credit-rating agencies failed to rein in conflicts of interest in giving high ratings to risky securities backed by subprime mortgages that later collapsed, federal regulators said Tuesday.

The results of the yearlong review by the Securities and Exchange Commission illuminate the role of Wall Street's credit rating industry in the turmoil that has gripped the financial markets in recent months.

The three agencies that dominate the industry _ Standard & Poor's, Moody's Investors Service and Fitch Ratings _ have been widely criticized for failing to identify risks in investments tied to high-risk subprime mortgages.

The rating agencies "sometimes deviated from their own models and their own procedures," SEC Chairman Christopher Cox said at a news conference. "Conflicts of interest were not always managed properly."

The problems were serious enough to cause concern among employees of the agencies themselves, Cox noted, citing internal e-mails uncovered in the SEC review. "There were generalized concerns about laxity, about adherence to stated norms," he said.

Among the conflicts of interest cited in the SEC report were the practice of companies that issue the securities paying the rating agencies for their work.

In one e-mail cited in the report, an analyst at one unnamed agency expressed concern that its model for determining ratings didn't capture "half" of a transaction's risk, but added that "it could be structured by cows and we would rate it."

The rating agencies have had to downgrade thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments has plummeted. The downgrades have contributed to hundreds of billions in losses and writedowns at major banks and investment firms.

The agencies are crucial financial gatekeepers, issuing evaluations of 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 last month proposed new rules designed to stem conflicts of interest and expand disclosure for credit rating agencies, which would require them to flag the ratings of more complex securities.

Among other things, the rules would ban the rating agencies from advising the investment banks on how to package securities to secure favorable ratings. Gifts over $25 from clients also would be prohibited.

The SEC also proposed changes that could reduce the status of rating agencies in financial markets, including making it possible for money-market funds to buy short-term debt without the current requirement that it be highly rated by the agencies. Continued...