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SECs Annual Examination Report of the Credit Rating Agencies: A Major Jolt and Concern for the Agencies


Home > Securitization > News on Securitization > Securitization in US > SECs Annual Examination Report of the Credit Rating Agencies: A Major Jolt and Concern for the Agencies


17th November, 2012:

The Securities and Exchange Commission (SEC) conducted on-site examination of all the Credit Rating Agencies registered with it and published its report[1] on November 15, 2012. Such process of annual examination is required under the Dodd Frank Act 2010[2] which was passed to reform the US capital market post the 2007-2009 crisis. The main concern was a better scrutiny of the credit rating agencies for the smooth working of the market participants. The examination was conducted by the staffs assigned by the SEC and the contents of the report raised concerns of the rating agencies as lax in following the predetermined methodologies and defaults were detected by the SEC staff while conducting the examination. Two of the main defaults that were unearthed are: 

  1. Policies framed were not followed by the rating agencies, and
  2. Inability to disclose rating method changes implemented by the rating agencies.

In the year 2006, the US Congress passed the Credit Rating Agency Reform Act which required the SEC to formulate clear guidelines for determining the eligibility criteria of such rating agencies to qualify as Nationally Recognised Statistical Rating Organizations (NRSROs). It also gave SEC the power to regulate such NRSROs. 

The findings of the SEC may be enumerated briefly as below: 

Conducting Business in Accordance with Policies, Procedures and Methodologies

The regulations require the rating agencies to have specific written policies and procedures regarding their rating procedures. These policies and procedures are also required to be disclosed in a proper format. The examination was conducted to determine whether that agency followed these procedures and policies in a proper manner or not. In several instances adherence to theses policies were lacking.

Management of Conflicts of Interest

The regulations also require the agencies to have similar written policies to counter the effects of conflicts those are encountered by the organization. The findings of the SEC showed that several policies to counter such conflicts of interests were also kept in dark and were not disclosed by the agencies.

Implementation of Ethics Policies

The SEC found weak and inconsistent ethics within the organization of the rating agencies.

Internal Supervisory Control

Weaknesses in the implementation of proper supervisory control over the process of ratings were found at an alarming rate.


The SEC found that governance related issues that are of utmost importance were not being conducted in a proper manner. Records of board activities were also not being maintained in a proper manner.

DCO Activities

DCO is required to perform important activities in the conducting of the business activities. The DCO is responsible for the establishment of policies and procedures for the receipt, retention and treatment of complaints. The examinations indicated that the roles played by the DCOs were not in conformity with the devised provisions of law.


There was lack of transparency in following the policies formulated for complaint redressal by the agencies  to a large extent.

 Large rating firms such as the Moody’s Corp, Mc Graw-Hill Cos Inc’s and the Standard and Poor’s have been criticized for their unfair practice of assigning good ratings to subprime mortgage backed securities which have tended to loose their lucrative essence in a short period. Another rating model used by the agencies known as the “issues-paid” rating model has attracted bad name with the SEC. In this model the issuer pays for their ratings to the rating agencies. However, till now the Commission did not express any explicit view regarding the analysis and findings of the report. A final step of the SEC is yet to come.




[Reported by: Piyush Sinha]

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