After a 10-month examination of three major credit rating agencies, the Securities and Exchange Commission said today that it has uncovered major problems in the way they rated subprime-mortgage securities.
“We’ve uncovered serious shortcomings at these firms,” SEC chairman Christopher Cox said at a news conference at the commission’s headquarters in Washington.
The problems, outlined in a report released today by the SEC, include a lack of disclosure to investors and to the public when the firms deviated from their own procedures when rating structured products, insufficient policies to manage the ratings process, and lack of attention to conflicts of interest.
The shortcomings are primarily a result of the rapid increase in work flow stemming from the explosion in the number and complexity of subprime-residential mortgage-backed securities and collateralized debt obligations that the firms rated, Mr. Cox said.
“With the huge burdens placed on the staff of credit ratings agencies to quickly analyze a great deal of new, sophisticated products, they sometimes deviated from their own models and their own procedures,” he said.
The agencies that were the subject of the report — Fitch Ratings Ltd., Moody’s Investor Services Inc. and Standard & Poor’s Ratings Services, all of New York — have all agreed to take remedial steps to improve their procedures, Mr. Cox said.
Neither he nor Lori Richards, director of the SEC’s office of compliance inspections and examinations, would say whether the commission plans to take enforcement action against the firms. But they said that many of the problems took place before they came under SEC regulation as national recognized statistical rating organizations last September.
Mr. Cox and Bob Colby, deputy director of the SEC’s division of trading and markets, said that they think that regulations proposed last month, which would require better disclosures by the agencies and enhance prohibitions of conflicts of interest, will help improve the process.
The SEC also plans to examine 10 more credit rating agencies that have registered with the commission since Congress enacted a law in 2006 requiring credit rating agencies to be regulated by the SEC.
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