SEC Examinations Find Shortcomings in Credit Rating Agencies’ Practices and Disclosure to Investors
Source: Security and Exchange Commission

The Securities and Exchange Commission today released findings from extensive 10-month examinations of three major credit rating agencies that 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.

Under new statutory authority from Congress that enabled the SEC to register and examine credit rating agencies, the agency’s staff conducted examinations of Fitch Ratings Ltd., Moody’s Investor Services Inc., and Standard & Poor’s Ratings Services to evaluate whether they are adhering to their published methodologies for determining ratings and managing conflicts of interest. 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 SEC staff’s examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized 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.

+ Full Report (PDF; 1.4 MB)

This entry was posted on Thursday, July 10th, 2008 at 12:09 am and is filed under Business and economics, Consumer issues, Ethics, Government and politics, Investments. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.