10/11/2011 08:31:00 AM EST
The SEC and Rating Agencies
The SEC examined all 10 firms registered Nationally
Recognized Statistical Rating Organization (.pdf 23 pages) and found all 10
had "apparent failures". The SEC has requested remediation plans from each of
the agencies within 30 days and is continuing its investigation.
The issues found included "apparent failures in some
instances to follow ratings methodologies and procedures, to make timely and
accurate disclosures, to establish effective internal control structures for
the rating process and to adequately manage conflicts of interest."
Personally, I think the rating agencies have not gotten
enough of the blame for their roles in the events leading up to the 2008
financial crisis. Without the golden top rating they issued to the toxic
mortgage-backed securities, I
think the popping of the housing bubble would not have been so vicious.
In 2006, the Credit Rating Agency Reform Act granted the
authority to establish a registration and oversight program for credit rating
agencies to the SEC and gave them oversight over those credit rating agencies
that register with the Commission as Nationally Recognized Statistical Rating
Organizations ("NRSROs"). However, it expressly prohibits the SEC from
regulating the substance of credit ratings or the procedures and methodologies
by which an NRSRO determines credit ratings.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act enhanced the regulation and oversight by imposing new reporting,
disclosure, and examination requirements. The new law also requires the SEC to
conduct an examination of each NRSRO at least annually. The 2011
Summary Report of t Commission's Staff Examinations of Each Nationally
Recognized Statistical Rating Organization (.pdf 23 pages) is the first to
look at the ten under the new framework.
Best Company, Inc.
Credit Rating Agency, Ltd.
Bond Rating Agency
Investors Service, Inc.
Credit Ratings, LLC
and Investment Information, Inc.
& Poor's Ratings Services
The SEC did not determine that any finding discussed in
this Report constitutes a "material regulatory deficiency". That would have
meant a referral to the Division of Enforcement and gotten more lawyers
involved. The SEC does not single out by name any credit-rating agency for
questionable actions in the report, but it does describe specific problems it
It will be interesting to see what happens next year. As
most compliance people know, the failure to fix a problem pointed out by the
SEC is likely to lead to trouble the next time they show up.
Recognized Statistical Rating Organization (.pdf 23 pages)
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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