SEC ISSUES ANNUAL REPORT ON CREDIT RATING AGENCIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission issued its annual staff report on the findings of examinations of credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs).  The agency also submitted an annual staff report on NRSROs to Congress.

“The two reports reflect an evolving industry,” said Thomas J. Butler, director of the SEC’s Office of Credit Ratings.  “The examination report shows that the SEC’s vigilant oversight is improving compliance at NRSROs, while the annual report to Congress depicts an industry that is growing more competitive and transparent.”

The 2010 Dodd-Frank Act requires the SEC to examine each NRSRO at least annually and issue a report summarizing key findings of the examinations.  The report discusses the staff’s findings and recommendations for each of the 10 NRSROs.  Among the areas examined are whether each NRSRO conducts business in accordance with its policies, procedures, and methodologies as well as how an NRSRO manages conflicts of interest and whether it maintains effective internal controls.

The report noted, for instance, that the staff found one or more NRSROs lacked comprehensive procedures governing ratings placed under review.  The staff also found that oversight of the process for developing new rating methodologies and criteria was not sufficient at one or more NRSROs to ensure independence from business and market share considerations.

The 2013 examination report highlights certain improvements among NRSROs, such as increased investment in compliance systems and infrastructure along with enhancements in compliance training for both analytical and non-analytical employees.  These improvements address recommendations that the staff made to NRSROs on prior examinations.

The annual report to Congress, which is required by the 2006 Credit Rating Agency Reform Act, identifies the applicants for NRSRO registration, actions taken on the applications, and the SEC’s views on the state of competition, transparency, and conflicts of interest among NRSROs.

Observations from the 2013 annual report include the following:

The number of NRSROs rose to 10 with HR Ratings de México, S.A. de C.V., registering in November 2012.
Some smaller NRSROs have gained significant market share in ratings for certain types of asset-backed securities.
Transparency is increasing due to the NRSROs issuing unsolicited commentary on ratings issued by other NRSROs.

The following SEC staff made significant contributions to the examinations and reports: Abe Losice, Michele Wilham, Kenneth Godwin, Natalia Kaden, Harriet Orol, Jacob Prudhomme, Diane Audino, Kristin Costello, Scott Davey, Shawn Davis, Michael Gerity, Julia Kiel, Joanne Legomsky, Russell Long, Carlos Maymi, David Nicolardi, Sam Nikoomanesh, Joseph Opron, Abraham Putney, Mary Ryan, Warren Tong, Evelyn Tuntono, and Kevin Vasel.

RATINGS COMPANY SETTLES MISSTATEMENTS CASE WITH SEC

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Jan. 22, 2013 — The Securities and Exchange Commission today announced that Egan-Jones Ratings Company (EJR) and its president Sean Egan have agreed to settle charges that they made willful and material misstatements and omissions when registering with the SEC to become a Nationally Recognized Statistical Rating Organization (NRSRO) for asset-backed securities and government securities.

EJR and Egan consented to an SEC order that found EJR falsely stated in its registration application that the firm had been rating issuers of asset-backed and government securities since 1995 — when in truth the firm had not issued such ratings prior to filing its application. The SEC’s order also found that EJR violated conflict-of-interest provisions, and that Egan caused EJR's violations.

EJR and Egan made a settlement offer that the Commission determined to accept. Under the settlement, EJR and Egan agreed to be barred for at least 18 months from rating asset-backed and government securities issuers as an NRSRO. EJR and Egan also agreed to correct the deficiencies found by SEC examiners in 2012, and submit a report – signed by Egan under penalty of perjury — detailing steps the firm has taken.

"Accuracy and transparency in the registration process are essential to the Commission’s oversight of credit rating agencies," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "EJR and Egan’s misrepresentation of the firm’s actual experience rating issuers of asset-backed and government securities is a serious violation that undercuts the integrity of the SEC’s NRSRO registration process."

Antonia Chion, Associate Director of the SEC’s Division of Enforcement, added, "Provisions requiring NRSROs to retain certain records and address conflicts of interest are central to the SEC’s oversight of credit rating agencies. EJR’s violations of these provisions were significant and recurring."

Eagan and his firm were charged last year for falsely stating on EJR’s July 2008 application to the SEC that it had 150 outstanding asset-backed securities (ABS) issuer ratings and 50 outstanding government issuer ratings, and had been issuing credit ratings in these categories on a continuous basis since 1995. Egan signed and certified the application as accurate. According to the SEC’s order, EJR had not issued any ABS or government issuer ratings that were made available through the Internet or any other readily accessible means. Therefore, EJR did not meet the requirements for registration as a NRSRO in these classes. The Commission found that EJR continued to make material misrepresentations about its experience in subsequent annual certifications. EJR also made other misstatements in submissions to the SEC, and violated recordkeeping and conflict-of-interest provisions governing NRSROs — which are intended to safeguard the integrity of credit ratings.

EJR and Egan agreed to certain undertakings in the SEC’s order, including that they must conduct a comprehensive self-review and implement policies, procedures, practices, and internal controls that correct issues identified in the SEC’s order and in the 2012 examination of EJR conducted by the SEC’s Office of Credit Ratings. EJR and Egan consented to the entry of the order without admitting or denying the findings. The order requires them to cease and desist from committing or causing future violations.

The SEC’s investigation was conducted by Stacy Bogert, Pamela Nolan, Alec Koch, and Yuri Zelinsky. The SEC’s litigation was led by James Kidney with assistance from Alfred Day and Ms. Nolan. The related examinations of EJR were conducted by staff from the SEC’s Office of Credit Ratings, Office of Compliance Inspections and Examinations, and Division of Trading and Markets. Examiners included Michele Wilham, Jon Hertzke, Mark Donohue, Kristin Costello, Scott Davey, Alan Dunetz, Nicole Billick, David Nicolardi, Natasha Kaden, and Abe Losice.