Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, July 8, 2008

SEC Releases Staff Report on Credit Rating Agencies

The SEC released a Summary Report of Issues Identified in the Commission Staff's Examinations of Select Credit Rating Agencies prepared by the staff of the Office of Compliance Inspections and Examinations, Division of Trading and Markets and Office of Economic Analysis.  In August 2007, the Securities and Exchange Commission’s Staff initiated examinations of three credit rating agencies -- Fitch Ratings, Ltd. (“Fitch”), Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) -- to review their role in the recent turmoil in the subprime mortgage-related securities markets. The focus of the examinations was the rating agencies’ activities in rating subprime residential mortgage-backed securities (“RMBS”) and collateralized debt obligations (“CDOs”) linked to subprime residential mortgage-backed securities, in order to develop an understanding of the practices of the rating agencies surrounding the rating of RMBS and CDOs.

According to the report's summary, the Staff’s examinations revealed that:

there was a substantial increase in the number and in the complexity of RMBS and CDO deals since 2002, and some of the rating agencies appear to have struggled with the growth;

significant aspects of the ratings process were not always disclosed;

policies and procedures for rating RMBS and CDOs can be better documented;

the rating agencies are implementing new practices with respect to the
information provided to them;

the rating agencies did not always document significant steps in the ratings process -- including the rationale for deviations from their models and for rating committee actions and decisions -- and they did not always document significant participants in the ratings process;

the surveillance processes used by the rating agencies appear to have been less robust than the processes used for initial ratings;

issues were identified in the management of conflicts of interest and
improvements can be made; and

the rating agencies’ internal audit processes varied significantly.

In addition, the Report summarizes conflicts of interest that are unique to these products and provides a factual summary of the models and methodologies used by the rating agencies.

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