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SEC Credit Ratings Exam Report Details Compliance Snafus

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The Securities and Exchange Commission’s just-released annual examination report on the nationally recognized statistical rating organizations (NRSROs) showed procedural improvements but also found instances where the rating agencies exhibited compliance shortcomings, notably not adhering to their own ratings criteria.

The SEC staff released two reports Tuesday to the Senate Banking and House Financial Services Committees — the annual report as well as a summary report of its exam findings.

SEC staff investigates compliance with federal securities laws and rules while identifying insufficient or failing conduct, procedures or internal controls and recommends remedial action.

For purposes of the audit, the three large NRSROs are Moody’s Investors Service Inc., S&P Global Ratings and Fitch Ratings Inc.

Seven others, including A.M. Best Ratings Services Inc. and Kroll Bond Rating Agency Inc., are referred to in the report as the smaller rating agencies.

The report doesn’t identify which rating agency didn’t adhere to specified policies although it provides a series of compliance snafus.

For example, the report notes that in two instances, one of the three large NRSROs failed to have information in its complaint log or in other documents regarding allegations made by three employees.

When SEC staff inquired about the allegations, this rating agency failed to initially hand over the relevant documents. The NRSRO did not record or even treat as a complaint, an allegation by an outside party that a rating was withdrawn “for self-serving purposes,” the SEC report stated.

The SEC also found that at times, the NRSROs didn’t stick to their own stated methodologies and criteria when determining ratings.

The report pointed to a larger NRSRO that failed to apply any published methodology in determining the credit rating while the accompanying press release failed to cite any methodology.

One of the big three NRSRO’s had several times used incorrect or non-current versions of materials in material prepared for its rating committee, according to the SEC staff report.

The SEC also recommended that a “larger NRSRO” apply its own criteria consistently, retain documents and stick to its policies in assigning and withdrawing ratings when the rating agency discovered inconsistencies in how certain non-credit risk criteria was applied since August 2010.

One large NRSRO’s transaction volume was so large that it hadn’t reviewed the terms and conditions of every one of its transactions properly to apply its criteria, the firm discovered. It also found it hadn’t kept all the required documents needed but after getting the missing documents from issuers, the NRSRO withdrew a significant number of other ratings for insufficient information.

A serious omission by a smaller rating agency involved making a rating but not publishing the rating or associated materials.

An investor inquiry led to the discovery four months later. In this instance, SEC staff recommended that the NRSRO adhere to its own policies for the publication of credit ratings on a timely basis.

The SEC examinations generally focused on the NRSROs’ activities for the full year 2017, although not in all cases.


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