WASHINGTON — Credit rating agencies have made strides in implementing mandatory reforms, the Securities and Exchange Commission said in two recent reports.
The agencies, however, still need to improve in several areas, according to the reports, including the way they handle conflicts of interest.
The reports noted the traditional domination of the municipal securities rating business by three ratings agencies continues.
Moody's Investors Service, Standard & Poor's, and Fitch Ratings account for nearly 90% of government securities ratings, according to the SEC's annual report on the nationally recognized statistical ratings organizations, or NRSROs.
The 2010 Dodd-Frank Act requires the SEC to examine each NRSRO once a year and issue an
Both reports were released last week.
Rating agencies were blamed for overrating risky securities that went on to default despite having investment-grade ratings.
Rules approved by the commission in August require NRSROs to put in place policies and procedures designed to ensure quality control of the ratings, publish a certificate with every rating that discloses the methodology used and limitations or uncertainties of the score, and apply rating symbols universally for all obligations.
During the 2014 examinations, the SEC said its staff observed improvements in record keeping, monitoring and culture, but said improvements are still needed in the management of conflicts of interest, document retention, and policies and procedures for determining or reviewing ratings.
For example, NRSROs operating under a model in which issuers pay for ratings might be inclined to overrate that issuer's securities to gain future business. The new rules require agencies to examine their ratings for conflicts and revise them if necessary.
"The SEC's enhanced oversight of NRSROs, informed by risk assessment, regular examinations and policy considerations, provides increasingly robust and effective oversight of the industry, as reflected by overall improvements in compliance, documentation, and board oversight," SEC Chair Mary Jo White said in a statement.
"The findings and recommendations in the 2014 examination report demonstrate the impact of rigorous oversight by the SEC and regular examinations by the Office of Credit Ratings," said Thomas Butler, director of the SEC's Office of Credit Ratings.
Representatives of the largest three muni raters said they will continue to work with the SEC to improve aspects of their business.
"We continue to make significant investments to enhance our training, quality, criteria, compliance, and risk management functions," said John Piecuch, an S&P spokesman.
Daniel Noonan, managing director and global head of communications at Fitch, said he is confident in Fitch's compliance.
"While we are confident that our policies and procedures are robust and meet regulatory standards, we will continue to co-operate fully with the SEC and address all of the issues raised by the staff in its examination," he said.
"Moody's continues to enhance our policies and procedures in light of regulatory developments, and the SEC staff's findings and recommendations are helpful in that effort," Moody's said in a statement.
