The Securities and Exchange Commission is once again exploring ways to reform credit ratings agencies, whose credibility was tainted by their failure to warn investors about the risks posed by complex financial products tied to subprime mortgages.

The commission is weighing ideas for revamping the $5 billion ratings business. Proposals range from more disclosures to new business models.

The Securities and Exchange Commission became the raters' overseer in 2006 under the Credit Rating Agency Reform Act. The law was a direct result of the collapse of Enron Corp., a company some raters listed as a good credit risk just days before the energy giant's bankruptcy exposed an accounting scandal. The measure gave the SEC the power to oversee raters and establish requirements for designating rating companies as nationally recognized statistical rating organizations, or NRSROs. The legislation authorized the commission to review the raters' disclosures and the consistency of their policies and penalize wrongdoing.

The law, however, didn't give the SEC authority to second-guess their opinions or methodologies. The agency also has been slow to exercise oversight because it needed to adopt a flurry of regulations. So far it has adopted rules to crack down on the conflict of interests posed by the long-standing requirement that issuers and banks pay raters to review their debt. "There is still more to do," SEC Chairwoman Mary Schapiro said during a daylong roundtable meeting in April with academics, lobbyists and the raters themselves.

Additional proposals include requiring all firms to publicize their ratings or publicly track their accuracy over time; creating an independent review board to oversee them; and requiring issuers to rotate ratings agencies every three years.

To increase competition among raters -- the business is now dominated by Standard & Poor's, Moody's Investors Service and Fitch Ratings -- some have proposed eliminating requirements forcing investment banks, insurance companies and other regulated entities to invest in NRSRO-rated products. To further boost alternative raters, the commission is considering allowing raters to be assigned randomly and paid from a revenue pool -- an idea issuers oppose.

"Quality would suffer" if random ratings agencies reviewed products, said Realpoint LLC CEO Robert Dobilas during the roundtable.

Former SEC Commissioner Joseph Grundfest suggested creating a category of credit ratings agencies owned and operated by the largest and most sophisticated debt market investors. "Because [those credit raters] would be controlled by the investor community, they would have powerful incentives to issue prudent, even skeptical, ratings," said Grundfest, now a professor at Stanford Law School. That model would spark competition and give investors "a seat at the table."

Grundfest's notion appeared to intrigue Schapiro and the other SEC commissioners.

Jim Kaitz, president of the Association of Financial Professionals and a longtime critic of the raters, advocates that NRSROs focus exclusively on providing credible and reliable ratings and be banned from providing consulting services. "These agencies would be able to interact with and advise organizations being rated but could not charge fees for providing advice," he said. They would be compensated by a flat transaction fee.

It's unclear which direction the SEC will take and whether it will propose new regulations, but the commission is likely to get a gentle push from counterparts in the European Union. On April 23 the European Parliament voted in favor of adopting new regulations for credit ratings agencies.

Firms seeking to issue credit ratings in the EU would need to register with the Committee of European Securities Regulators, while a "college" of regulators would monitor an individual rater on a day-to-day basis. The EU also bars firms from providing advisory services and from rating financial instruments if they do not have sufficient information and expertise. In addition, raters must disclose the methodologies and assumptions used to formulate their grades.

To be sure, the major U.S. raters won't take kindly to similar changes here, but the tide appears to be against their wishes.

Donna Block covers accounting regulation for The Deal.