The Securities and Exchange Commission Monday formally returned to seven major credit rating agencies their status as “nationally recognized statistical rating organizations.”

That was good news for the rating agencies, still smarting from the criticism heaped on them for being slow to respond to — or partially responsible for — the subprime mortgage meltdown. But the renewal of NRSRO status — essentially a license to operate — leaves open the question of how the SEC will address the rating firms’ widely perceived shortcomings.

Under the Credit Rating Agency Reform Act, which passed a year ago this month, all credit rating agencies once known as NRSROs were required to reapply for the designation. Congress also told the SEC to create a more formal and transparent process for recognizing NRSROs, which the SEC finalized this spring.

For decades before that, NRSRO status was bestowed informally by the SEC, but became a de facto rating agency license that was widely blamed for creating an oligopoly dominated by Moody’s and Standard & Poor’s. Those two, in particular, came in for fierce criticism for maintaining investment grade ratings on Enron until just days before the company declared bankruptcy.

To many observers, the subprime mortgage crisis seemed similar — or even worse, given the rating agencies’ involvement in blessing many of the securitization vehicles that now hold so many defaulting mortgages.

The newly approved NRSROs include A.M. Best Company, DBRS, Fitch, Japan Credit Rating Agency, Moody’s Investors Service, Rating and Investment Information and Standard & Poor’s Ratings Services. All seven firms previously held NRSRO status.

Under the new law, the SEC can remove a rating agency’s NRSRO status, but this is the equivalent of a death penalty. The SEC’s announcement of renewed NRSRO status for the seven firms, without even a delay in the wake of the subprime mortgage crisis, suggests the regulator is not likely to use that option, even as a threat.

Exactly what other regulatory powers the SEC has are not clear, though it is clearly under pressure to do something. Members of the House Financial Services Committee recently questioned whether the law did enough to address investors’ criticisms of the ratings agencies following Enron’s collapse. And more questions are sure to come when a House Financial Services subcommittee holds a planned hearing to address the responsibilities and independence issues of NRSROs. Similar reviews are reportedly underway in the Senate and at the International Organization of Securities Commissions, and President Bush has asked Treasury secretary Henry Paulson to look into the agencies’ role in the mortgage industry.

For its part in responding to the subprime-loan mess, the SEC has started looking at the rating agencies’ polices and procedures, specifically in the area of mortgage-backed securities and CDOs. The SEC’s review will include “the advisory services they may have provided to underwriters and mortgage originators, their conflicts of interest, disclosures of their ratings processes, the agencies’ rating performance after issuance, and the meanings of assigned ratings,” said Eric Sirri, director of the SEC’s Division of Market Regulation, during a recent House hearing.

Indeed, Moody’s recently received a documentation request from the SEC related to subprime matters, according to the agency’s general counsel John Goggins, who says Moody’s is in the process of complying with the request.

All the attention will probably reaffirm that Congress was right to think rating agencies needed SEC oversight, SEC commissioner Annette Nazareth told CFO.com in a recent interview. But she admits that won’t make most critics happy. “They wish government edict would make the credit rating agencies smarter and faster,” she says. “The Credit Rating Agency Reform Act does not address that nor should it.”

In fact, as CFO.com has reported, in giving the SEC more authority over the agencies, Congress did not allow the SEC to second-guess ratings themselves. “Congress did not intend for the SEC to get involved in the substance of ratings,” Dave Brey, compliance officer for A.M. Best Co., told CFO.com. The SEC can inspect the agencies and use enforcement tools if their practices prove abusive to investors. But much of the oversight involves making sure the agencies have proper disclosures and behave consistently in their policies, procedures, and methodologies.

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