50/50 Failure, Compliance with NRSROs Spotted on Rating Agencies

Jack Humphrey, Regulatory journalist
September 30, 2011 /

Despite changes made by some of the examined credit rating agencies to improve their operations, some concerns at each of the Nationally Recognized Statistical Rating Organizations (NRSROs) have been identified by the Securities and Exchange Commission.

In a report issued by the staff of SEC summarizing the staff’s observations and concerns arising from the examinations of ten credit rating agencies registered with the SEC as NRSROs and subject to SEC oversight, apparent failures in some instances to follow ratings methodologies and procedures, to make timely and accurate disclosures, to establish effective internal control structures for the rating process and to adequately manage conflicts of interest, have been observed.

The report notes that the staff made various recommendations to the NRSROs to address the staff’s concerns and that in some cases the NRSROs have already taken steps to address such concerns.

“This report demonstrates the SEC’s enhanced oversight of credit rating agencies,” said Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE).

“We have recruited experts and strengthened the overall monitoring and examination process to better protect investors, ensure market integrity, and facilitate capital formation.”

The SEC staff conducted the examinations as required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection, which imposed new reporting, disclosure and examination requirements to enhance the regulation and oversight of NRSROs.

Among other things, the Dodd-Frank Act requires the Commission staff to examine each NRSRO at least annually and issue an annual report summarizing the essential findings of the examinations.

“We are today issuing the first of the Commission staff’s annual reports on the examinations of the NRSROs,” said Norm Champ, the Deputy Director of OCIE.

“We expect the credit rating agencies to address the concerns we have raised in a timely and effective way, and we will be monitoring their progress as part of our ongoing annual examinations.”

Examination staff from the Commission’s Office of Compliance Inspections and Examinations and NRSRO monitors from the Commission’s Division of Trading and Markets conducted these examinations.

Abe Losice, Rina Hussain, Jon Hertzke, David Beaning, Kenneth Godwin, Said Rafat, Natasha Kaden, Harriet Orol, Alan Dunetz, Diane Audino, Scott Davey, Kristin DeVitto, Ethan Allfree, Jennifer Fournier, Lisa Jordan, Kenny Sabogal, Bernard Bujack, Shanti Radkar, Jackie Sturgill, William Beggs, Scott Follin, Trinita Love, Jason Wentworth, Shipra Wells, Linda Heaphy and Steven Gilchrist, all contributed to the examinations.


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