Regulators said Friday that they found reasons for concern during reviews of 10 credit-rating agencies responsible for grading corporate bonds, U.S. Treasury securities, insurance companies and the like.
At one rating agency, a key analyst might have helped rate a company in which the unidentified analyst was an investor, according to a report by the Securities and Exchange Commission staff.
Another rating agency might have told some people about rating actions before the potentially market-moving information went public.
One of the larger agencies issued ratings that were inconsistent with its own methodologies and then apparently neglected to disclose or correct the errors in a timely fashion, the report said.
But, in a report mandated by Congress, the SEC staff withheld details and chose not to name the rating agencies where it found problems. Sparing ratings agencies embarrassment, the SEC left investors in the dark as to what the findings might mean for the reliability of any particular rating agency or investment.
The firms are known as Nationally Recognized Statistical Rating Organizations, or NRSROs.
“We didn’t name names because we are separately following up with each NRSRO about the specific findings and recommendations regarding each of those NRSROs, and we believe it’s more effective to do that directly with each NRSRO and for purposes of the public report identify the key issues that we’ve observed,” said Carlo V. di Florio, who heads the SEC’s Office of Compliance Inspections and Examinations.
“In the report, we believe it is fair and consistent with due process not to name names,” said Norm Champ, deputy director of OCIE.
The report’s findings were couched in jargon and often qualified with words such as “it appears” and “may have.”
The major credit-rating agencies are Moody’s, Standard & Poor’s and Fitch. Other agencies are A.M. Best, DBRS, Egan-Jones Ratings, Japan Credit Rating Agency, Kroll Bond Rating Agency, Morningstar Credit Ratings, and Rating and Investment Information.
The performance of rating agencies has been under scrutiny since the bursting of the housing bubble revealed that securities built on toxic mortgages had received top ratings.
The parent company of Standard & Poor’s, McGraw-Hill, disclosed this week that the SEC staff is considering recommending enforcement action against S&P over a 2007 investment offering known as a collateralized debt obligation.
In response to the financial crisis, Congress last year passed and President Obama signed the Dodd-Frank Act, which called on the SEC to issue an annual report summarizing what it found in examinations of the firms.
The reviews generally covered Dec. 1, 2009, through Aug. 1, 2010, the report said. That preceded a decision by Standard & Poor’s to downgrade the U.S. government, an action that regulators have also been scrutinizing.
The SEC has not determined that any of the findings it summarized constitute a “material regulatory deficiency,” but it might do so in the future, the report said.
Daniel J. Noonan, a spokesman for Fitch, said by e-mail that “any concerns that do pertain to Fitch are being swiftly addressed.”
Asked Friday which of the findings pertained to them, Fitch, Moody’s and Standard & Poor’s did not answer.
Each of the three larger rating agencies has improved its operations in recent years, the report said.
According to the report, “one of the larger” firms “erroneously applied its ratings methodology” to “a considerable number” of asset-backed securities. The SEC staff is concerned about “the delay in discovering, disclosing and remediating the error,” the report said.
All of the agencies failed to follow their rating procedures in some instances, the report said.
The report faulted agencies’ management of conflicts of interest that can arise if employees’ hold or trade securities that the firms rate. For example, at one of the smaller firms, a key analyst “may have directly owned a security of a company that was subject to a rating action in which the analyst participated,” the report said.
Rating agencies often have a built-in conflict of interest, because they are paid by companies whose securities they grade. Two of the larger companies did not have policies to deal with potential conflicts of interest when they rate companies that are among their major shareholders, the report said.
The upgrading or downgrading of a business or investment can affect its stock price, but at one of the larger rating firms, the procedures for spreading word of such actions appeared to allow for “limited dissemination” before the news is made public, the report said.
Other rating agencies appeared to needlessly delay the release of rating decisions, increasing the possibility that the information would spread “inappropriately,” the report said.