Statement at News Conference Announcing Release of Examination Report on Credit Rating Agencies
Chairman Christopher Cox
U.S. Securities and Exchange Commission
July 8, 2008
Thank you for joining us this afternoon at the SEC’s Washington headquarters offices. I have an important announcement to make concerning the public release of our report on the examination of the largest firms in the credit rating industry.
In the 10 months since the SEC’s authority over credit rating agencies went into effect, we have been aggressively using this new authority from Congress to examine the adequacy of credit rating agencies’ public disclosures, their management of conflicts of interest, and their ability to prevent unfair, abusive, or coercive behavior in their rating practices.
More specifically, in light of the subprime mortgage crisis and resulting credit crunch, our examinations have focused on credit rating agencies’ process of rating subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), and whether credit rating agencies diverged from their stated methodologies and impartial procedures for determining credit ratings in order to publish higher ratings in the course of bringing these complicated structured finance products to market.
Today, we’re releasing our findings in these extensive examinations of three credit rating agencies: Moody’s, S&P, and Fitch. Our examinations included hundreds of thousands of pages of the rating agencies’ internal records and e-mail records relating to their ratings of subprime RMBS and CDOs, and the SEC staff has analyzed the ratings history of thousands of structured finance products.
As detailed in the report we are releasing today, 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.
Primarily, these shortcomings are the result of the rapid increase in work flow stemming from the explosion in the number and complexity of subprime RMBS and CDOs. With the huge burdens placed on the staffs of credit rating agencies to quickly analyze a lot of new sophisticated products, they sometimes deviated from their own models and their own procedures.
Significant aspects of the ratings process were not always disclosed, such as when firms deviated from their models and why.
Conflicts of interest were not always managed properly.
When the firms didn’t have enough staff to do the job right, they often cut corners.
That’s the bad news. There’s also good news. And that’s that the problems are being fixed in real time.
First of all, the SEC has proposed sweeping new rules to regulate the internal policies and business practices of credit rating agencies.
Our proposed reforms would address conflicts of interest in the credit rating industry and require new disclosures designed to increase the transparency and accountability of credit rating agencies.
Our proposed rules also 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.
And our 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.
The recent events affecting our economy and our markets have galvanized regulators around the world to re-examine the regulatory framework governing credit rating agencies, but ultimately the responsibility for providing meaningful ratings to investors begins with the credit rating firms themselves.
Therefore, the second way that these problems at credit rating agencies are being dealt with in real time is that the firms themselves have committed to addressing their shortcomings with changes in their own procedures.
Each of the firms examined can take steps as recommended by SEC staff to improve their practices, policies and procedures with respect to rating RMBS and CDOs, and other structured finance securities, going forward.
Each credit rating agency examined has agreed to take remedial measures to address the issues we’ve identified.
As detailed in our report, these examinations clearly indicate that more needs to be done at credit rating agencies to ensure that investors can have confidence in this system of ratings.
While this report describes examination findings at three credit rating agencies, there are a total of 10 credit rating agencies that have registered with the SEC since the law was passed. Now, there is more competition than ever before, and that is one important way to provide a check against substandard practices or rating procedures.
To ensure that everyone is playing by the rules, we will initiate examinations of each of the other credit rating agencies registered with the SEC in the coming months.
Now, to explain the examination findings in greater detail, I will turn it over to Lori Richards, the Director of our Office of Compliance Inspections and Examinations, and then to Bob Colby, the Deputy Director of the Division of Trading and Markets, to describe how our proposed rules will address the problems in the ratings of structured products that we have uncovered.
And as I turn it over to Lori, I want to specifically thank her and everyone on the SEC staff involved in these examinations. These examinations involved an extensive amount of work by approximately 40 SEC staff members, and they are to be commended for their commitment to serving investors.