WASHINGTON ― Securities and Exchange Commission staff found “apparent failures” at each of the 10 credit rating agencies they examined, including Standard & Poor’s, Moody’s, and Fitch, the agency said on Friday in its first annual report on credit raters.
The SEC sent letters outlining the staff’s concerns to each of the ratings firms and demanded a remediation plan with 30 days, an agency official said in a conference call with reporters.
The SEC staff said concerns include failures to follow ratings methodologies, failures in making timely and accurate disclosures and failures to manage conflicts of interest.
The SEC’s report was required by last year’s Dodd-Frank financial oversight law.
The staff report did not single out by name any credit-rating agency for questionable actions, but it did describe specific problems it found.
Two of the three largest firms, for example, did not have specific policies in place to manage conflicts of interest when rating an offering from an issuer who is also a large shareholder of the firm.
The industry is dominated by Moody’s Corp, McGraw-Hill Cos Inc’s Standard & Poor’s and Fimalac SA’s Fitch Ratings.
One of the large firms, the report said, did not have effective procedures in place to prevent leaks of ratings before they are published, the report said.
One of the three firms also failed to follow its methodology in rating certain asset-backed securities, was slow to discover, disclose and fix the errors, and may have let business interests influence its mistakes, the report said.
The report said the SEC has not determined that any of the findings constituted a “material regulatory deficiency” but said it might do so in the future.
“We expect the credit rating agencies to address the concerns we have raised in a timely and effective way, and we will be monitoring their progress as part of our ongoing annual examinations,” said Norm Champ, deputy director of the SEC’s Office of Compliance Inspections and Examinations.
Congress first empowered the SEC to closely regulate ratings firms in 2006, and the Dodd-Frank law gave the agency even greater powers over the industry.
Credit raters have been widely criticized for fueling the financial crisis by giving top ratings to subprime mortgage securities that collapsed in value as the housing market cooled.
On Monday, McGraw-Hill disclosed that the SEC might charge its S&P unit with breaking securities laws over ratings it gave a package of securitized mortgages in 2007.
SEC Enforcement Director Robert Khuzami told Reuters this week that the agency faces hurdles proving wrongdoing at credit-rating agencies, pointing to the complexity of the cases and the industry’s strong legal defenses. But he added that it would not stop the agency from probing possible misconduct.