On September 30, 2011, the SEC staff issued the summary report of its examinations of the 10 credit rating agencies registered with the SEC as Nationally Recognized Rating Organizations (the “NRSROs”). The Dodd-Frank Act requires the SEC staff to conduct an examination of each NRSRO at least annually. Each examination must include a review of the following:
- whether each NRSRO’s business is conducted in accordance with its policies, procedures and rating methodologies
- the NRSRO’s management of conflicts of interest
- the NRSRO’s implementation of ethics policies
- the NRSRO’s internal supervisory controls
- the governance of the NRSRO
- the activities of the designated compliance officer of the NRSRO
- the processing of complaints by the NRSRO
- the NRSRO’s policies governing the post-employment activities of former staff
The report covers NRSRO activities for the period from December 1, 2009, to August 1, 2010. In the report, the staff concluded that none of its findings constitute a “material regulatory deficiency.” The staff observed that NRSROs are trending toward the issuer-pay business model and away from the subscriber-pay model.
The staff’s findings indentified several trouble spots among the largest NRSROs. For example, one of the larger NRSROs reported that it has failed to follow its methodology for rating certain asset-backed securities, and according to the staff, this resulted in the issuance of ratings that were inconsistent with the NRSRO’s methodologies. Among other recommendations, the staff recommended that the NRSRO conduct a comprehensive review of the circumstances surrounding the error. In addition, the staff found that all of the NRSROs failed to follow their ratings procedures in some instances although none of these instances were material. With respect to conflicts of interests, the staff found that two of the largest NRSROs did not have specific policies and procedures for managing the potential conflict of rating issuers that may be significant shareholders of the NRSROs. The staff recommended that these two NRSROs establish specific policies and procedures to disclose and manage potential conflicts of interests in this context.