The Treasury Department said on Tuesday it hopes new disclosure and conflict of interest rules will curb the power of credit rating agencies that have been blamed for fueling the recent financial crisis.

The Treasury sent an 18-page draft bill to Congress that would prevent credit rating agencies from consulting for the companies they are responsible for evaluating.

Shares of Moody's and McGraw Hill , parent of Standard & Poor's, extended losses after the announcement.

The Securities and Exchange Commission would have new powers to regulate the industry and companies would have to disclose when they go ratings shopping in two other provisions of the plan.

In recent years, investors were overly reliant on credit rating agencies that often failed to accurately describe the risk of rated products, the Treasury said in a statement.

The reform is meant to help reduce reliance on credit rating companies, the government said.

Still, the plan does not tinker with the basic business model that has ratings agencies relying on fees from the companies that they evaluate.

Officials concluded that there was no way to eliminate conflicts and the best approach was to identify and regulate problem areas, said Michael Barr, Treasury assistant secretary for financial institutions.

Look at the investor-pay models -- investors would still have a conflict because they own these securities being rated, Barr told reporters on a conference call.

Our basic approach is to say we understand the potential for conflict in this area and we need tough rules to regulate conflict of interest.

Standard & Poor's declined to comment on the plan while a Moody's spokesperson did not immediately return a call for comment.

Tuesday's plan was the latest in a series of proposals from President Barack Obama's administration to modernize financial services regulation in light of a costly credit crisis that began two years ago.

Sliding home values and record foreclosures exposed deep flaws in how lenders pushed mortgage loans, Wall Street bundled securities for investors and ratings agencies weighed risk.

While lawmakers and regulators agree that the current system is flawed, the administration has not been able to quickly move a reform package through Congress and many issues will remain unresolved until lawmakers return from a summer break that begins in early August.

While officials have said credit rating agencies share some blame for allowing the current crisis, the Treasury plan does not clear hurdles that would make it easier for investors to file class action lawsuits.

Including such a provision in the statute would overly inflate the role of credit rating agencies and induce more blind-faith reliance on credit rating, Barr said. We think the system needs to fundamentally move away from that approach with better investor due diligence.

The SEC, which is tasked with protecting investors, is gathering fresh powers to regulate the credit rating agencies.

Last week, SEC Chairman Mary Schapiro said her agency would work harder to keep ratings agencies from looking for the most lax rating companies and otherwise better scrutinize the sector.

(Reporting by Patrick Rucker and Richard Cowan in Washington with Walden Siew and Dena Aubin in New York; Editing by Chizu Nomiyama)

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