SEC Finds Shortcomings in Credit Rating Agencies’ Practices

The Securities and Exchange Commission (SEC) has released findings from its 10-month examinations of three major credit rating agencies, which uncovered significant weaknesses in ratings practices and the need for remedial action by the firms to provide meaningful ratings and the necessary levels of disclosure to investors. With the recent subprime market turmoil, the SEC has been particularly interested in the rating agencies’ policies and practices in rating mortgage-backed securities and the impartiality of their ratings. The examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralised debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately. “We’ve uncovered serious shortcomings at these firms, including a lack of disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest,” said SEC chairman Christopher Cox. “When the firms didn’t have enough staff to do the job right, they often cut corners. That’s the bad news. There’s also good news. And that’s that the problems are being fixed in real time. The recent events affecting our economy and our markets have galvanised regulators around the world to re-examine the regulatory framework governing credit rating agencies, but ultimately the responsibility for providing meaningful ratings to investors begins with the credit rating firms themselves.”


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