S.E.C. Finds Problems at Credit-Rating Agencies

The examinations were mandated in the Dodd-Frank regulatory law passed last year after numerous investigations into the causes of the financial crisis. Several of those inquiries found that the agencies issued inaccurate reports, failed to report or manage conflicts of interest and put generating revenue ahead of rigorous financial analysis.

For the investing public, however, the S.E.C.’s report is likely to be of limited value because the commission declined to name the credit ratings agencies at which it found deficiencies. Instead, it refers to its findings as occurring either at one or more of the three large agencies — Moody’s Investors Service, Standard Poor’s and Fitch — or at one or more of the seven smaller ratings firms.

The report also found that all three of the large agencies and four of the small ones had weak controls or inadequate policies for ownership of securities by employees.

The findings have not resulted in any enforcement actions by the agency, but staff members could refer some or all of its findings to the enforcement division for further investigation.

Inflated credit ratings were the subject of several investigations into the causes of the financial crisis. A report by the Senate permanent subcommittee on investigations issued in April noted that more than 90 percent of the highest, or AAA, ratings given to mortgage-backed securities in 2006 and 2007 “were later downgraded to junk status, defaulted or withdrawn,” causing huge investor losses.

In a conference call with reporters, commission staff members said it was not forbidden by the Dodd-Frank statute or the commission’s own regulations from disclosing the names of the companies whose procedures it found deficient. Carlo Y. di Florio, director of the office of compliance inspections and examinations, said, “We made a decision internally that it was most effective” not to name the companies.

“We didn’t name names because we are separately following up” with each ratings agency about the findings, Mr. di Florio said, a path he said was “more efficient.”

The commission’s report said that each of the three larger ratings agencies “has made changes to improve its operations” since the last periodic examination in 2007-8. But the report also noted that all of the 10 agencies “failed to follow their ratings procedures in some instances.”

The report specifically said that the failure of one of the largest ratings firms to follow its own procedures resulted in ratings of asset-backed securities that were inconsistent with its publicly disclosed standards. “The staff is concerned about the extent to which market share and business considerations may have contributed” to the failure, the report said.

Mr. di Florio declined to disclose the company’s name. A footnote in the report said that the agency itself reported its analysis error as the S.E.C. staff was conducting its examination, which covered the period Dec. 1, 2009, through Aug. 1, 2010.

In August 2010, the S.E.C. released a separate report on its investigation of Moody’s, which found that the company made false statements in its registration as a ratings agency with the S.E.C. and failed to follow its procedures and methodologies for determining credit ratings.

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