Sen. Elizabeth Warren, Massachusetts Democrat, has questioned regulatory oversight of credit rating agencies, saying the U.S. Securities and Exchange Commission needs to take “meaningful action” to curb their activities.

According to the Democratic presidential candidate and frequent Wall Street critic, regulators have failed to heed the lessons of the financial meltdown even though Congress “rightly identified the rating agencies as culprits.”

“There are strong indications that rating agencies are continuing to prop up risky financial products,” she wrote SEC Chairman Jay Clayton in a letter.

Warren cited one financial product in particular — collateralized loan obligations.

“These securitizations have helped enable increased leveraged loans that are generally poorly underwritten and include few protections for lenders and investors, which creates significant risk to the financial system and the American economy,” she said.

“It is deeply concerning that the SEC has not taken meaningful action to ensure that [CLO ratings] securities are accurate and not unduly influenced by conflicts of interest,” the senator added.

A record $128.1 billion of CLOs were arranged in the U.S. in 2018 and about $88 billion has been raised so far this year. The market is the largest buyer of leveraged loans, which companies rely on for financing.

Warren also noted that the post-crisis Dodd-Frank Act required the SEC to study the rating industry’s “issuer-pays” model, which has been criticized for incentivizing rating firms to give better ratings, regardless of the risk.

“The flawed incentives that lead to inflated ratings … still remain,” she complained. “There are even indications that due to the increased competition in the industry, the perverse incentives have increased in recent years.”

Warren urged the SEC “to prevent the growing bond inflation from reaching catastrophic levels similar to those that caused the 2008 financial crisis” and asked Clayton to explain why, among other things, the commission has “failed to recommend a business model for the industry that ensures that bond rating agencies remain objective and independent from the undue influence of bond issuers.”

The senator has previously expressed concerns about “growing risks” in the leveraged lending and CLO markets.

Photo by Joshua Lott/Getty Images

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