SEC Finds Shortcomings in Credit Rating Agencies’ Practices and Disclosure to Investors
 
July 14, 2008
 

On July 8, 2008, the SEC released its findings from its 10-month examination of Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. The examination was conducted by staff in the SEC’s Office of Compliance Inspections and Examinations, Division of Trading and Markets, and Office of Economic Analysis. The focus of the examination was on the rating agencies’ activities in rating subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) linked to RMBS. The examination concentrated on gaining an understanding of the ratings methodologies employed by the rating agencies and the role of conflicts of interest in the ratings process.

The staff’s examination found:

• rating agencies appear to have struggled with the increase in both number and complexity of RMBS and CDO deals since 2002
• significant aspects of the ratings process were not always disclosed
• policies and procedures for rating RMBS and CDOs could be documented better
• rating agencies will implement new practices relating to information provided to them
• rating agencies failed to consistently document significant steps and participants in the rating process, including the rationale for deviations from models and for rating committee actions and decisions
• rating agencies used surveillance processes that were less robust than the initial rating process
• issues were identified in the management of conflicts of interest
• there was significant variance among the rating agencies’ internal audit processes

In response to the above findings, the staff has recommended remedial actions to the rating agencies, including that they: (i) periodically examine whether they have sufficient staff and resources to manage the volume of business and conduct surveillance of outstanding RMBS and CDO ratings; (ii) conduct a review of their current disclosures relating to methodology and process for rating RMBS and CDOs; (iii) conduct a review to determine whether their written policies and procedures relating to determining credit ratings for RMBS and CDOs are fully documented; (iv) conduct a review of their current policies and practices for documenting the credit ratings process and the identities of RMBS and CDO ratings analysts and committee members; (v) review practices, policies and procedures for mitigating and managing conflicts of interest; and (vi) review whether their internal audit functions, particularly in the RMBS and CDO ratings areas, are adequate.

http://www.sec.gov/news/press/2008/2008-135.htm

http://www.sec.gov/news/studies/2008/craexamination070808.pdf