March 2, 2021

S.&P., Accused of Faulty Math, Fights Error Disclosure Rule

In a letter to the Securities and Exchange Commission dated Monday, Deven Sharma, the president of S. P., said that while it believed the company should disclose “significant errors” that affect ratings, the S.E.C. should avoid rules that would define what types of errors were significant enough to require disclosure.

The letter was in response to proposed S.E.C. regulations that would tighten oversight of major ratings firms like S. P., Moody’s and Fitch Ratings. The proposals are part of the Dodd-Frank Act, the overhaul of securities law passed last year by Congress, which resulted from the 2008 financial crisis.

By coincidence, the period for comments on the proposed S.E.C. rule expired on Monday. Three days earlier, S. P. downgraded its long-term rating on United States Treasury bonds, to AA+ from AAA, but only after the Treasury Department challenged the assumptions that went into the S. P. decision.

The Treasury Department said its analysis revealed “a basic math error of significant consequence,” while S. P. argued that it was not an error but simply a change in assumption that did not affect its final decision to cut the rating.

Even before the downgrade, Congress was pressing regulators to finish rules governing credit ratings and the rating agencies. S. P.’s argument that it should decide how much information it discloses could prompt lawmakers to increase their scrutiny of the agencies.

Two Congressional committees, one each in the House and the Senate, are reviewing the actions of the ratings agencies since the 2008 financial crisis. Senator Tim Johnson, Democrat of South Dakota and chairman of the Senate banking committee, began gathering information about the S. P. downgrade decision this week, said Monday that he was “deeply disappointed” in what he called an “irresponsible move” by S. P., one that could increase interest rates on consumer loans and raise financing costs for state and local governments.

The oversight and investigations subcommittee of the House financial services committee also has been examining the performance of ratings agencies since the financial crisis. At a hearing late last month, Republican members raised questions about whether Treasury officials tried to intervene to discourage S. P. from putting United States debt securities under review for a downgrade. That investigation is continuing, Republican committee staff members said this week.

At the July 27 hearing, some committee members said they felt regulators were moving too slowly to put into effect parts of the Dodd-Frank Act that would lessen the reliance of investors on credit ratings. Specifically, regulators at the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the S.E.C., among others, are being asked by lawmakers to delete references to specific credit ratings in securities regulations

The proposed S.E.C. rules would require ratings agencies to submit regular self-assessments of their internal controls to regulators.

Among the issues on which the S.E.C. asked for comment was whether the ratings agencies should be required to notify the public of “significant errors” that they find in their methodologies, and whether the S.E.C. should define what exactly constitutes a “significant error.”

Mr. Sharma, the S. P. president, said in his response to the S.E.C. that the company agreed that ratings agencies should be required to disclose “significant errors” in their methodologies. But, he added, the S.E.C. should not impose an “arbitrary definition” of what constitutes a significant error, but rather leave it to the agency to decide what is significant and what is minor.

“Because credit ratings reflect the subjective opinions of a committee of ratings analysts and often incorporate both quantitative and qualitative factors, we believe it would be difficult, if not impossible, for the commission to establish a principled definition for what might have constituted a ‘significant error,’ ” Mr. Sharma wrote.

He added, “We have found that our error correction policy has proven to be effective and, where errors have occurred, our practice of reacting swiftly and transparently has benefited the market.”

The Treasury Department might beg to differ. After it discovered the flaw in the deficit projections used by S. P. to justify its downgrade, the Treasury argued against the downgrade.

Catherine J. Mathis, a Standard Poor’s spokeswoman, said on Tuesday that while the firm did change its assumptions regarding the pace of discretionary spending growth based on its discussions with Treasury on Friday, its rating change “was not affected by the change of assumptions.”

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