The Securities and Exchange Commission (SEC) has charged six credit rating agencies with “significant recordkeeping failures” and imposed almost $50 million in fines.
The Securities Exchange Act requires credit rating agencies to retain all internal and external communications received and sent by the agencies as well as their employees that are related to rating activities. The SEC found that the firms violated these recordkeeping provisions, according to a Sept. 3 statement.
Employees at Moody’s were found to have communicated through their personal mobile devices using messaging platforms such a WhatsApp, according to an SEC order. These messages included discussions regarding initiating, determining, maintaining, monitoring, changing, or withdrawing a credit rating.
The SEC found that Moody’s “failed to maintain or preserve messages concerning Credit Rating Activities” as required by regulations. As such, the firm was determined to have violated Section 17(a) of the Securities Exchange Act.
The agencies “agreed to pay combined civil penalties of more than $49 million and have begun implementing improvements to their compliance policies and procedures to address these violations,” the statement said.
Moody’s and S&P Global Ratings will pay $20 million each in civil penalties, Fitch Ratings $8 million, AM Best $1 million, HR Ratings de Mexico $250,000, and Demotech $100,000. In addition to penalties, the agencies were ordered to never violate the provisions in the future.
In an emailed statement to The Epoch Times, AM Best said it was pleased the matter was resolved.
“AM Best places great importance on our regulatory responsibilities and remains committed to the integrity of our ratings process and high-quality independent credit ratings,” it stated.
S&P Global said that the SEC order on the issue recognized the rating agency’s “remedial acts and its cooperation with the SEC staff,” according to a Sept. 3 statement.
Compliance Efforts
Barring AM Best and Demotech, the remaining four agencies are required to retain compliance assistants, according to the terms of the settlement.AM Best and Demotech had “engaged in significant efforts” to adhere to recordkeeping requirements early on and also cooperated with SEC investigations, owing to which both firms were exempted from having to retain a compliance consultant, the SEC stated.
“We have seen repeatedly that failures to maintain and preserve required records can hinder the staff’s ability to ensure that firms are complying with their obligations and the Commission’s ability to hold accountable those that fall short of those obligations, often at the expense of investors,” said Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement.
“In today’s actions, the Commission once again makes clear that there are tangible benefits to firms that make significant efforts to comply and otherwise cooperate with the staff’s investigations.”
Doubts have been cast in past years on the value provided by credit rating agencies.
In 2008, during the financial crisis, major credit agencies failed to identify and warn about the risks of instruments such as mortgage-backed securities.
“The motivation to avoid high-profile failures has given way to signs that rating agencies are acting more defensively today than before the crisis, delivering more accurate and relevant ratings for investors,” a post about the study noted.
