One has to hand it to Senator Shelby. The Banking Committee he chairs is on a roll. Recently, he took the opportunity of a hearing with the chairman of the Securities and Exchange Commission to dilate on the virtues of hedge funds even as Senator Schumer and some of his other colleagues stewed on the issue. Now his committee has voted out a version of a House-passed bill to open up the credit rating industry. It’s nice to know that someone in Washington still takes seriously the interests of markets and the investing public.

The bill, known as the Credit Rating Agency Reform Act, would loosen the SEC’s stranglehold on what is effectively a duopoly in the rating business. In 1975, the SEC created a rule designating some credit raters as “nationally recognized statistical ratings organizations” whose ratings could be used for many regulatory calculations, such as reserve requirements.The problem is that whether a rating agency received the imprimatur depended on whether it was already “nationally recognized.”

In 1975, that meant three main agencies — Standard & Poor’s, Moody’s, and Fitch. It’s been almost impossible to for newcomers to achieve the coveted certification because the SEC’s criteria for awarding it have remained clouded in mystery. A handful have succeeded in overcoming that obstacle over the years, but all of the upstarts went on to be acquired by the big incumbents. The big three now control 95% of the credit rating business in America; Moody’s and S&P count for 80%. Economists suspect the agencies are benefiting from cartel profits. S&P and Fitch are subsidiaries of larger companies so measuring their profitability is essentially impossible, but Moody’s figures are impressive. Its annual operating profit margin regularly surpasses 50%.

Savvy observers have suspected for some time now that the agencies would benefit from some competition. For one thing, such experts as Professor Lawrence J.White of New York University have argued that it’s impossible to tell how accurate credit ratings actually are. Bond prices generally fall after a downgrade. No one knows, however, whether that’s because the market trusts the rating agency’s assessment or merely because any downgrade moves a company one step closer to the rating at which most institutions will be legally required to sell whether or not the rating is accurate. Certainly the failure of the ratings agencies to raise red flags about Enron and WorldCom until just before those companies collapsed only adds to the suspicion.

Ending the duopoly would open the door to other innovations. New ratings agencies could provide ratings at the behest of creditors instead of borrowers. Although the norm now is that a company hires an agency to rate its own debt, there’s no bar to an agency offering ratings on a subscription basis to the people contemplating buying a bond. That the current agencies choose to work with borrowers instead of lenders is just a matter of taste and convenience. Absent competition, they have no reason to change.

Some have suggested there’s no longer any need for the SEC to certify rating agencies at all, and there’s something to be said for that argument. Others insist that the NRSRO designation is so pervasive that eliminating it would disrupt regulatory functions. Congress has come up with the next best thing, setting minimum standards for any company that wants to gain status. If the bill passes, any firm that tracks the performance of its ratings and puts its code of ethics on the Web would be able to hang out a shingle. If more competition were to lead to lower costs, more accurate ratings and new ways of distributing that information, as many of us reckon it would, it would be a boon to corporate borrowers and their shareholders. It might also increase the number of agencies keeping their eyes and ears open for the next Enron or WorldCom and alerting markets to trouble on the horizon.