KEY FINDINGS OF THE STAFF REPORT ON RATING AGENCIES

Rating agencies, officially known as nationally recognized statistical rating organizations or NRSROs, played a key role in the evolution of the market crisis. Accordingly, the Dodd-Frank Wall Street Reform and Consumer Protection Act included a series of provisions bolstering their reporting obligations and restructuring their activities. The SEC’s authority over the organizations was enhanced as discussed here. That authority began with the Credit Rating Agency Reform Act of 2006.

The SEC staff has published its most recent report regarding on the latest examinations of these agencies. It is titled: “2011 Summary Report of Commission Staff’s Examinations of Each Nationally Recognized Statistical Rating Organization” (here). The Report identifies ten NRSROs.

Key findings in the report include:

• Fees: The NRSROs are trending toward an issuer pay business model in contrast to the subscribers pay model. This trend is occurring with respect to asset-backed securities. Three of the smaller agencies using this payment model “appear to have some weakness” in their policies and procedures for managing the potential conflicts arising from it.

• Reform: Each of the three large NRSROs have devoted what the report calls “notable resources” toward responding to staff comments from the July 2008 examinations. Those exams focused on the rating of subprime residential mortgage-backed securities and collateralized debt obligations.

• Following procedures: All of the agencies failed to follow their ratings procedures in some instances. One of the larger NRSRO’s self-reported a failure to comply with its procedures regarding its ratings methodology for certain asset backed securities. Two of the smaller agencies had “notable” instances of apparent failures to adhere to the policies and procedures for committee review of rating actions.

• Adopting procedures: Two of the larger agencies did not have specific policies and procedures for managing the potential conflict of rating issuers that may be significant shareholders of the firm.

• Separation of functions: One of the smaller NRSROs had “weak barriers” between its rating analysts and those employed in an ancillary service that presents a potential conflict of interest.

• Supervision: Three of the smaller agencies have weak internal supervisory controls.

• Selective dissemination: At one of the larger agencies the policies for the publication of a rating allowed for early, selective disclosure. At three of the smaller organizations there appeared to be unnecessary delay in publication.

Program: The Impact of the Supreme Court’s Decision in Morrison v. National Bank of Australia on securities litigation and SEC enforcement actions. Presented by Celequ Legal Education in conjunction with West Thomson. Webcast on October 12, 2011 from 12:00 to 1:00 EST. For furtrher information please click here