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 had issued inaccurate reports, failed to report or manage conflicts of interest and appeared to 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 did not name the agencies at which it found deficiencies. Instead, it described its findings as having occurred either at one or more of the three large agencies — Moody’s Investors Service, Standard Poor’s and Fitch Ratings — 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 S.E.C. also said the procedures at one of the large ratings agencies “appeared to allow for limited dissemination of a pending rating action in some instances prior to public dissemination.”
Changes in credit ratings have the potential to affect not only the prices a company’s bonds bring but its stock price as well. And sometimes the overall market is affected. The S.E.C. has begun an inquiry into whether news of Standard Poor’s pending downgrade of United States government debt was leaked, and the information traded upon, before it was officially announced in August.
“The takeaway for both individual investors and institutions is to always have a skeptical eye when looking at ratings agencies,” Katherine Addleman, a partner at Haynes and Boone, a Dallas law firm.
The findings have not resulted in any enforcement actions by the agency, but staff members could refer some or all of the findings to the enforcement division for further investigation. Ms. Addleman said the report was typical of those issued after the S.E.C. conducts a sweep of brokerage firms to check on compliance with regulations. After those inquiries, it often outlines areas where firms should bring themselves into compliance or risk enforcement action.
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, members of the commission staff said neither the Dodd-Frank statute nor the commission’s own regulations forbade the disclosure of the names of the companies whose procedures had been found deficient. Carlo V. 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” the findings with each agency, Mr. di Florio said.
The commission’s report said 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 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 had 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 name the company. A footnote in the report said that the agency itself had 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 an investigation of Moody’s, which found that the company had made false statements in its registration as a ratings agency with the S.E.C. and had failed to follow its procedures for determining credit ratings.
Anthony Mirenda, a Moody’s spokesman, declined to comment on the specific findings in the report. “Moody’s welcomes the S.E.C.’s constructive recommendations to our industry,” he said.
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