The leading knowledge platform for the financial technology industry
The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

SEC Issues Report Cautioning Credit Rating Agencies

Share article

The Securities and Exchange Commission (SEC) today issued a report cautioning credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.

The SEC’s Report of Investigation stems from an Enforcement Division inquiry into whether Moody’s Investors Service, Inc (MIS) — the credit rating business segment of Moody’s Corporation — violated the registration provisions or the antifraud provisions of the federal securities laws.

The Report says that because of uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct, the Commission declined to pursue a fraud enforcement action in this matter. The Report notes that the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act provided expressly that federal district courts have jurisdiction over SEC enforcement actions alleging violations of the antifraud provisions of the securities laws when conduct includes significant steps, or a foreseeable substantial effect, within the United States. The Report also notes that the Dodd-Frank Act amended the securities laws to require nationally recognised statistical rating organisations (NRSROs) to “establish, maintain, enforce, and document an effective internal control structure governing the implementation of and adherence to policies, procedures, and methodologies for determining credit ratings.”

“Investors rely upon statements that NRSROs make in their applications and reports submitted to the Commission, particularly those that describe how the NRSRO determines credit ratings,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “It is crucial that NRSROs take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings.”

According to the Report, an MIS analyst discovered in early 2007 that a computer coding error had upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for certain constant proportion debt obligation notes. Nevertheless, shortly thereafter during a meeting in Europe, an MIS rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact MIS’s business reputation.

MIS applied in June 2007 to be registered with the Commission as an NRSRO. The Report notes that the European rating committee’s self-serving consideration of non-credit related factors in support of the decision to maintain the credit ratings constituted conduct that was contrary to the MIS procedures used to determine credit ratings as described in the MIS application to the SEC.

In the Report of Investigation, the Commission makes clear that credit rating agencies registered with the SEC must implement and follow appropriate internal controls and procedures governing their determination of credit ratings, and must also take reasonable steps to ensure the accuracy of statements in applications or reports submitted to the SEC.

The Report cautions NRSROs that, when appropriate, the Commission will pursue antifraud enforcement actions against deceptive ratings conduct, including actions pursuant to the Dodd-Frank Act provisions regarding conduct that physically occurs outside the United States but involves significant steps or foreseeable effects within the US.

Under Section 21(a) of the Securities Exchange Act of 1934, the Commission may investigate violations of the federal securities laws and at its discretion “publish information concerning any such violations.” David Frohlich, Margaret Cain, Roger Paszamant, and Dean Conway conducted the SEC’s investigation. The Commission acknowledges the assistance and cooperation of foreign regulatory authorities in Europe in this investigation.

Related content

WEBINAR

Recorded Webinar: How far should counterparty screening go? Balancing the ideal and the realistic

Counterparty screening is a regulatory requirement, but do you know enough about your clients’ clients, and beyond? How can you source this information and how does it benefit your business? How far do you need to dig into entity ownership structures? This webinar discusses these challenges and how they relate to your organisation, whether you’re...

BLOG

Live at Data Management Summit USA Virtual – Day Two Keynote and Q&As

A-Team Group’s Data Management Summit USA Virtual Day Two was based on the theme of best practices for data driven strategies in today’s new normal. The day started with an informative live keynote from Arvind Joshi, director of data management at Scotiabank, on how to establish data quality for analytics. This was followed by three...

EVENT

TradingTech Summit London

The TradingTech Summit in London brings together European senior-level decision makers in trading technology, electronic execution and trading architecture to discuss how firms can use high performance technologies to optimise trading in the new regulatory environment.

GUIDE

Regulatory Data Handbook 2020/2021 – Eighth Edition

This eighth edition of A-Team Group’s Regulatory Data Handbook is a ‘must-have’ for capital markets participants during this period of unprecedented change. Available free of charge, it profiles every regulation that impacts capital markets data management practices giving you: A detailed overview of each regulation with key dates, data and data management implications, links to...