WASHINGTON (Dow Jones/AP) ? Securities and Exchange Commission chairman William Donaldson said yesterday that legislation may be needed to increase oversight of credit-rating agencies.

In testimony prepared for delivery to the Senate Banking Committee, Donaldson said the SEC ?would stand ready to work with Congress on crafting appropriate legislation? if Congress deems it necessary.

The SEC recently proposed defining what it means to be a nationally recognised credit-rating firm, but said it lacks authority to directly oversee such firms.

Credit-rating agencies are developing a voluntary plan for self policing, but Donaldson said that would not give the SEC the same clout as would legislative authority.

For instance, he said, if a rating firm didn?t abide by voluntary codes of conduct, the SEC would not be able to bring an enforcement action against that firm.

?The commission believes that to conduct a rigorous programme of NRSRO oversight, more-explicit regulatory authority from Congress is necessary,? Donaldson said in his prepared remarks.

The SEC staff currently designates which firms are nationally recognised statistical rating organisations, or NRSROs. Critics say there are too few ratings firms, and believe the industry may be riddled with conflicts of interest.

Until last week, just four firms were designated as NRSROs ? Dominion Bond Rating Service; Fitch Ratings Inc.; Moody?s Investors Service, a unit of Moody?s Corp. and Standard & Poor?s, a unit of McGraw-Hill Cos.

A.M. Best Co., of Oldwick, New Jersey, announced that the SEC had designated it as an NRSRO. A.M. Best began publishing credit ratings in 1999 for corporate debt, preferred stock and commercial paper as an extension of its ratings for securities issued by insurance and reinsurance firms.

Shares of Moody?s fell 85 cents, or 1 percent, to $85.39 in midday trading yesterday on the New York Stock Exchange. McGraw-Hill shares dropped $3.38, or 3.5 percent, to $92.47.

On another subject, Donaldson indicated the SEC will not be moving quickly on a proposal to create a so-called ?hard close? for mutual fund trading at 4 p.m. Eastern time.

He told lawmakers the SEC is analysing alternatives and is not likely to consider a final rule until the middle of the year.

Lastly, Donaldson said the SEC is closely scrutinising how companies are complying with the Sarbanes-Oxley Act of 2002, including internal-control reporting rules.

He said the SEC?s advisery committee on smaller public companies will consider whether the cost imposed by the law is proportionate to its benefits.