SEC report on shortcomings in Credit Rating Agencies' Practices and Disclosure to Investors
09 July 2008
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, SEC Chairman Cox said.
The SEC report finds that rating agencies struggled significantly with the increase in the number and complexity of sub-prime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. Also, none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the 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.
Further findings of the Summary Report include:
- The rating agencies did not always document significant steps in the ratings process - including the rationale for deviations from their models and for rating committee actions and decisions - and they did not always document significant participants in the ratings process.
- The surveillance processes used by the rating agencies appear to have been less robust than the processes used for initial ratings.
- Issues were identified in the management of conflicts of interest and improvements can be made.
- The rating agencies' internal audit processes varied significantly.
Press release
Summary Report
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