On Friday, the Office of the Inspector General of the SEC released a report entitled “The SEC’s Role Regarding and Oversight of Nationally Recognized Statistical Rating Organizations (NRSROs).” The report details the results of the Inspector General’s recent review of the SEC’s oversight of NRSROs. The review was undertaken as a result of the Inspector General’s “continuous effort to assess the Commission’s programs and operations.”
In the report, the Inspector General criticized the Commission and Staff, saying that it was slow to implement regulations and on certain occasions failed to comply with procedural requirements of the Rating Agency Act and the Commission’s own implementing rules. Specifically, the Inspector General cited one instance where the Division of Trading and Markets recommended approval for a credit rating agency (CRA) despite the fact that the Division had “identified numerous significant concerns with the CRA’s application.” In two other instances, the Inspector General found that that the Division of Trading and Markets had granted NRSROs extensions of time to file annual certifications or reports, while, under the law, such an extension could only be granted by the Commission. Responsibility for the examination of Credit Rating Agencies has since been moved to the Office of Compliance Inspections and Examinations (OCIE).
Additionally, the Inspector General identified several areas in which it believes the effectiveness of the NRSRO examination program could be improved. Specifically, the report recommends that OCIE examinations become part of the application process, a proposal that would require further legislative authority. The report also recommends that the Commission:
- Require CRAs to submit audited financial statements as part of the application process.
- Impose further restrictions on consulting and advisory services performed by NRSROs.
- Require NRSROs to monitor and update credit ratings on a periodic basis.
- Implement analyst rotation to reduce the risk of “undue pressure” on credit rating analysts.
- Require enhanced disclosures regarding the credit rating process.
- Evaluate the effect of the “revolving door” on credit rating quality.
- Assess the potential effects of proposed amendments concerning the disclosure of material non-public information by NRSROs.
- Recommend rules designed to address forum shopping for credit ratings.
- Solicit public comment on CRA’s applications for NRSRO ratings.
In addition, the Inspector General recommended several areas in which the Commissions annual report to Congress under the Credit Rating Agency Reform Act of 2006 could be improved.
The report comes during a period of increased attention by the Commission and Congress to issues relating to CRAs and NRSROs. Last month, the Senate Banking Committee held a hearing related to increased regulation of CRA’s. In July, Chairman Schapiro testified before the House Financial Services Committee. In her testimony, Chairman Schapiro advocated for legislation requiring the registration of all CRAs. Chairman Schapiro also highlighted recent efforts by the SEC to address concerns regarding CRAs. Specifically, Chairman Schapiro noted the adoption of measures, and reintroduction of others, intended to increase transparency and accountability at NRSROs in order to address concerns about the integrity of their credit rating procedures and methodologies. In addition Chairman Schapiro reported that she had allocated additional resources to establish a branch of examiners dedicated specifically to conducting examination oversight of the NRSROs, as well as directed the Commission staff to explore possible new regulations in this area, including limiting the potential for rating shopping.