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Credit Raters Improving in Compliance But Problems Remain, SEC Staff Report Says

Tuesday, December 31, 2013

Dec. 26 --While nationally recognized statistical rating organizations are improving in meeting their compliance obligations, the Securities and Exchange Commission staff continues to identify problems during examinations of the entities.

In a Dec. 24 report, staff in the SEC Office of Credit Ratings said they found, among other problems, that one larger and five smaller NRSROs did not follow their rating procedures and methodologies in certain instances. In addition, one larger NRSRO did not follow its rating criteria development policies and procedures in some instances.

Moreover, four smaller NRSROs did not have sufficient procedures and controls for separating their business and analytical functions or for preventing their analysts from being involved in fee discussions.

The report did not identify the NRSROs by name. However, the report clarified that Standard & Poor's Ratings Services, Moody's Investors Service Inc. (MCO) and Fitch Ratings Inc. are the “larger” NRSROs, and all the others are the “smaller” NRSROs.

On the same day, the OCR staff issued a separate report to Congress saying that S&P, Moody's and Fitch continue to dominate the business. 

10 NRSROs.

There currently are 10 credit rating agencies registered as NRSROs with the SEC. The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the SEC, through the OCR, to examine each NRSRO at least once a year and to issue an annual report summarizing its “essential findings.”

The SEC also is required by the 2006 Credit Rating Agency Reform Act to submit an annual report to Congress on the state of competition, transparency and conflicts of interest among NRSROs.

OCR director Thomas Butler said in a release that the two reports show that the credit rating industry is evolving. “The examination report shows that the SEC's vigilant oversight is improving compliance at NRSROs, while the annual report to Congress depicts an industry that is growing more competitive and transparent,” he said.

The OCR's exam report covered NRSRO activities occurring between Oct. 1, 2011, through Dec. 31, 2012. The report said that the commission has not determined whether any of the discussed findings constitutes a “material regulatory deficiency” but may do so in the future. 


In other findings, the staff said there were five general areas of improvement since the last report:

• documentation, disclosure and board oversight of criteria and methodologies;

• investment in software or computer systems;

• increased prominence of the designated compliance officer role;

• implementation or enhancement of internal controls; and

• compliance with internal policies and procedures.

The staff also found that the NRSROs appropriately addressed recommendations made in the OCR's 2012 report.

In its annual report to Congress, the OCR found that while the largest NRSROs continue to be the top issuers of ratings in most rating categories, some of the smaller NRSROs have managed to build market share in certain categories, such as that for asset-backed securities.

The report also found that most of the NRSROs continue to operate under the issuer-pay model rather than the subscriber-pay model. It further said that transparency is increasing in the industry due to NRSROs issuing unsolicited commentary on ratings issued by other NRSROs.

The reporting summarizing the staff's exam findings is available at

The annual report to Congress is available at

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