SEC Hammers Credit-Rating Agencies In Report
Profits before quality control - that’s the conclusion of a 10-month investigation by the Securities and Exchange Commission (SEC) into how the nation’s three largest credit-rating firms failed to protect investors because of their reviews of subprime mortgage-backed securities.
SEC Chairman Christopher Cox announced the findings at a news conference on July 8, revealing that the SEC found “serious shortcomings†in the business practices and quality control standards of Moody’s Investor Services, Standard & Poor’s Ratings Services and Fitch Ratings.
The three major rating agencies found themselves under fire earlier this year after having given top credit ratings to securities based on toxic subprime mortgages. When thousands of the securities were subsequently downgraded following the subprime meltdown, the value of the investments plummeted, forcing investment banks and securities firms to take billions of dollars in losses and write-downs onto their balance sheets.
In its final report, the SEC said the rating agencies had struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The report showed that none of the rating agencies examined had specific written or comprehensive procedures for rating RMBS and CDOs.
Moreover, significant aspects of the rating process were not always disclosed or even documented by the ratings firms, and conflicts of interest were not always managed appropriately.
“We’ve uncovered serious shortcomings at these firms, including a lack of disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest,†said SEC Chairman Christopher Cox in a press release issued by the SEC.
Last month, the SEC proposed a series of reforms designed to regulate conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies.
• The first segment of the reforms would address conflicts of interest in the credit ratings industry and require new disclosures designed to increase the transparency and accountability of credit ratings agencies.
• The second portion would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds through the use of different symbols or by issuing a report disclosing the differences.
• The third part of the SEC’s proposed rulemaking would clarify for investors the limits and purposes of credit ratings and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.
In June, Moody’s, S&P, and Fitch reached an agreement with New York state Attorney General Andrew Cuomo in an attempt to overhaul the firms’ incentives for providing their services.
The SEC report can be viewed in its entirety at:http://www.sec.gov/news/studies/2008/craexamination070808.pdf
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
