The Justice Department sued S&P on Feb. 4, alleging the company inflated ratings on mortgage securities to win business, which helped trigger the financial crisis. S&P said in a Feb. 5 statement it will fight “vigorously” against the “meritless” claims. The government, which hasn’t sued Moody’s or Fitch, has proposed a trial start date of Feb. 17, 2015.

‘Mechanistic Reliance’

Spokesmen for the pension funds and attorneys general declined to comment on the ratings requirements as did Michael Adler, a spokesman for Moody’s. Governments should “reduce mechanistic reliance on ratings by modifying references to ratings in certain regulations,” Ed Sweeney, a spokesman for S&P, said in an e-mailed statement. Investor guidelines should allow for a “variety of credit opinions.” Daniel Noonan, a spokesman for Fitch, said in an e-mail.

S&P said in a September court filing that the U.S. brought its case in retaliation for downgrading the government’s credit rating to AA+ from AAA in August 2011. At a Feb. 5 news conference announcing the case, Associate Attorney General Tony West said there was “no connection” to the downgrade.

Regulators have used the ratings of S&P and Moody’s, both of which trace their roots to before the Federal Reserve was established in 1913, to manage risk. In 1936, the Office of the Comptroller of the Currency banned banks from holding bonds graded below investment grade, or less than BBB- by S&P and Baa3 at Moody’s. In 1975, SEC regulations designated the companies and Fitch as Nationally Recognized Statistical Rating Organizations, or NRSROs.

‘Competitive Moat’

The top three firms benefit from a “competitive moat,” in part because of the regulatory hurdles facing new companies, according to Peter Appert, an analyst at Piper Jaffray & Co. in San Francisco, who boosted earnings estimates for Moody’s and S&P last month.

Companies seeking accreditation by the SEC need to be in business for at least three consecutive years and prove that at a minimum 10 institutional investors use their product. Ten companies have obtained the NRSRO license.

“Most fund managers are unwilling to go through the hassle of trying to change the guidelines,” Rob Dobilas, who founded Realpoint LLC, the credit rating company bought by Morningstar Inc. in March 2010, said in a telephone interview. “I was shocked that investors pushed back” about implementing changes.

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