Standard & Poor’s Ratings Services has received a Wells Notice from the Securities and Exchange Commission notifying the credit rating agency that it ma be subject to possible enforcement action over alleged violations of federal securities laws. The allegations involve S & P\u2019s ratings for the Delphinus CDO 2007-1, a collateralized debt obligation. <\/p>\n
The $1.6 billion hybrid CDO was downgraded just a few months after it received AAA ratings from both S & P and Moody\u2019s Investor Services\u2014the two biggest credit rating agencies in the country\u2014by the end of 2008 its securities that were rated AAA had been downgraded to junk status. S & P\u2019s parent company McGraw-Hill says that the credit rating agency is cooperating with the Commission\u2019s examination into this matter. If the SEC were to file an enforcement action against S & P, it would be its first one against a credit rating agency for the rating of a mortgage-backed security.<\/p>\n
Just today, the SEC staff expressed concern that despite changes that were implemented at credit rating agencies to better their operations, the Commission is still concerned about certain deficiencies. The SEC voiced its concerns in its first yearly report on Nationally Recognized Statistical Rating Organizations. Alleged deficiencies include: <\/p>\n
\u2022\tNot always following ratings procedures or methodologies.
\n\u2022\tFailure to make accurate and timely disclosures.
\n\u2022\tImproper management of conflict of interest.
\n\u2022\tLack of effective internal control structures for the rating process. <\/p>\n
\nThe new annual reports was mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection, which is seeking better oversight and regulation of credit rating agencies. 10 credit rating agencies registered as NRSROs were examined. The names of the NRSROs weren\u2019t published.<\/p>\n
It was just earlier this year that the Senate Permanent Subcommittee on Investigations issued its bipartisan report noting that the most \u201cimmediate cause\u201d of the financial crisis three years ago was the \u201cmass ratings downgrades\u201d of securities in 2007 that were made by Moody\u2019s and S & P. Per the report, credit rating agencies were aware that their ratings wouldn\u2019t \u201chold\u201d and held back on putting up more strict ratings criteria. When they did modify their risk models that noted there were high-risk mortgages being issued, the revised models were not applied to existing securities. All of this allowed investment banks to push out high-risk investments before the tougher criteria were implemented.<\/p>\n
\nCredit ratings changes can impact not just a company\u2019s bond prices but also its stock price. The market can also be impacted. <\/p>\n
For the time ever, S & P downgraded the US credit rating a notch lower than AAA. The credit agency expressed concern about the federal government\u2019s ability to take care of its finances. S & P noted that the bipartisan agreement to look for at least $2.1 trillion in budget savings was not enough to quell the nation\u2019s debt in the long run. Now, the SEC is looking into whether news of S & P\u2019s downgrade of the country\u2019s debt was leaked and the info used for trading before it was officially made known.<\/p>\n
S&P downgrades U.S. credit rating for first time<\/a>, Washington Post, August 5, 2011<\/p>\n S.E.C. Faults Credit Raters, but Doesn\u2019t Name Them<\/a>, NY Times, September 30, 2011<\/p>\n SEC Staff Issues Summary Report of Commission Staff’s Examinations of Each Nationally Recognized Statistical Rating Organization<\/a>, SEC, September 30, 2011<\/p>\n Standard and Poor\u2019s Ratings Lawsuit to Go Forward, Says Judge<\/a>, Institutional Investment Fraud Blog, September 16, 2010<\/p>\n
\nMore Blog Posts:<\/strong>
\nMoody\u2019s, Fitch, and Standard and Poor\u2019s Were Exercising Their 1st Amendment Rights When They Gave Inaccurate Subprime Ratings to SIVs, Says Court, Institutional Investment Fraud Blog, December 30, 2010<\/p>\n