Clear and Consistent Rules
Amid Market Turmoil

In 2008, the Office of Compliance Inspections and Examinations examined whether broker-dealers and investment advisers were enforcing rules designed to prevent the spread of false information. This heightened regulatory attention has helped reduce the risk of rumor-fueled stampedes in the midst of market turmoil.

On several occasions, the Office of the Chief Accountant and the Division of Corporation Finance addressed questions about the disclosure of fair value measurements of hard-to-value assets in inactive markets, consolidation of off-balance sheet entities, and the accounting treatment of bank support for money market funds. The SEC also worked with the Financial Accounting Standards Board to help preparers and auditors understand fair value measurement guidance in the declining markets. And in December 2008, the SEC completed a congressionally-mandated study of mark-to-market accounting that included several recommendations for improvements that are being undertaken by the Financial Accounting Standards Board.

Strengthening Credit Ratings

Armed with new authority from Congress that for the first time made credit rating agencies a regulated industry, the SEC adopted rules in 2008 to address weaknesses and conflicts of interest in the ratings process. This rulemaking was informed by extensive SEC examinations of the three largest credit rating agencies, Moody’s, Standard & Poor’s, and Fitch, which had exposed how bad loans were converted into highly-rated securities. Hundreds of thousands of pages of the rating agencies’ internal records and emails reviewed by the SEC exposed a house of cards that helped structured mortgage securities escape serious investor scrutiny.

The SEC analyzed the ratings history of thousands of structured finance products. This revealed serious shortcomings, including a lack of adequate disclosure to investors and the public, a lack of policies and procedures to manage the ratings process, and conflicts of interest. In response, the SEC’s new rules regulate the internal policies and business practices of credit rating agencies, including their management of conflicts of interest, and require new disclosures of the ratings process to provide transparency, accountability, and competition in the credit rating industry.

The SEC analyzed the ratings history of thousands of structured finance products. This revealed serious shortcomings, including a lack of adequate disclosure to investors and the public, a lack of policies and procedures to manage the ratings process, and conflicts of interest. In response, the SEC’s new rules regulate the internal policies and business practices of credit rating agencies, including their management of conflicts of interest, and require new disclosures of the ratings process to provide transparency, accountability, and competition in the credit rating industry.