SEC lets Moody's off the hook in warning to rating agencies
The Securities and Exchange Commission today cautioned credit rating agencies about internal conduct and methods the firms use to determine the riskiness of financial products. The SEC announcement stems from an inquiry by its enforcement division into whether Moody's Investors Service violated registration provisions or anti-fraud provisions of federal securities laws. While the SEC declined to pursue a fraud enforcement action in this case, the commission notes that Dodd-Frank gives federal district courts jurisdiction over SEC enforcement actions that allege violations of the anti-fraud provisions of the securities laws. The report also notes the Dodd-Frank Act amended the securities laws to require nationally recognized statistical rating organizations (NRSROs) to "establish, maintain, enforce, and document an effective internal control structure governing the implementation of and adherence to policies, procedures, and methodologies for determining credit ratings," according to a release from the SEC. "Investors rely upon statements that NRSROs make in their applications and reports submitted to the commission, particularly those that describe how the NRSRO determines credit ratings," said Robert Khuzami, director of the SEC's division of enforcement. "It is crucial that NRSROs take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings." The SEC inquiry stems from allegations that a Moody's computer coding error improved, "by 1.5 to 3.5 notches," the credit ratings for certain debt obligation notes. "Nevertheless, shortly thereafter during a meeting in Europe, a Moody's rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact Moody's business reputation." Write to Jacob Gaffney.