Securities Law Prof Blog

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

Thursday, November 15, 2012

SEC Issues Staff Report on NRSROs

The SEC issued its second annual staff report on the findings of examinations of credit rating agencies registered with the SEC as Nationally Recognized Statistical Rating Organizations (NRSROs).( Download Nrsro-summary-report-2012[1])The staff determined that with one exception, all NRSROs appropriately addressed the staff's recommendations in the first annual report in 2011. In addition, the staff announced a new initiative to highlight compliance issues at credit rating agencies between examinations.

The Dodd-Frank Act requires the Commission staff to examine each NRSRO at least annually and issue a report summarizing the essential findings of the examinations. In the reports, firms are referred to as "large NRSROs" or "small NRSROs" to promote the public's understanding without compromising due process requirements.

Findings identified at one or more NRSROs include the following:

The methodology applied to rating certain securities appears to have been changed, but the change was not publicly disclosed for several months
Certain securities were not timely downgraded in accordance with policies and procedures related to rating watch status
Methodologies were published and disclosed inconsistently and in a less-than-transparent manner
Directors were not actively exercising their required oversight duties

In addition to the recommendations to NRSROs based on the 2012 exams, the SEC's Office of Credit Ratings will promote compliance between exams by sending letters to the Designated Compliance Officers at all of the firms as issues arise. The first industry-wide "Dear DCO" letter, sent today, urges NRSROs to review SEC rules on preventing the misuse of material nonpublic information and avoiding unfair, coercive, or abusive practices with respect to credit ratings. The letter is available on the SEC's website.

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