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From Securities Regulation Daily, December 28, 2015

SEC reports improvements in overall credit rating agency compliance

By Jacquelyn Lumb

Credit rating agencies have improved their overall compliance cultures and some of the smaller agencies have continued to increase their market share, according to the SEC’s latest Dodd-Frank Act required reports. The SEC is required to examine each of the nationally recognized statistical rating organizations in eight review areas and also to report annually on the level of competition, the NRSROs’ transparency, and their conflicts of interest. Chair Mary Jo White said the SEC’s oversight of the NRSROs has contributed to their improvements.

Examination report. There were 10 credit rating agencies registered as NRSROs as of December 1, 2015. The examinations covered their activities for the 2014 calendar year and were based upon individualized risk assessments, including self-identified weaknesses, and tips, complaints, and referrals. The report includes a summary of the administrative enforcement proceedings brought against Standard &Poor’s Ratings Services in January 2015 and DBRS, Inc. in October 2015.

The staff also assessed whether the recommendations from its previous year’s reports had been appropriately addressed and found in the case of one smaller NRSRO that it did not do so with respect to its rating methodology.

The staff found that all of the NRSROs have taken measures to increase their understanding of their obligations as regulated entities. However, the summary of essential findings includes instances where both larger and smaller NRSROs fell short in adhering to their ratings policies and procedures; their management of conflicts of interest; and in their internal supervisory controls. The staff also identified some weaknesses in the area of governance involving the independence of directors. In addition, some of the NRSROs’ designated compliance officers did not fulfill their responsibilities, and there were weaknesses in some of the agencies’ handling of complaints.

In future examinations, the staff will continue to assess the agencies’ responses to its recommendations and will modify the scope of its examinations to reflect new and amended NRSRO rules.

Annual report. The staff annual report identifies applicants for registration as NRSROs, the actions taken on the applications, and the Commission’s view of the state of competition, transparency, and conflicts of interest among the NRSROs. It covers the period from June 26, 2014, to June 25, 2015. The report also summarizes the SEC’s rulemaking and other staff publications affecting NRSROs during the report period.

While the top three NRSROs continue to dominate the ratings market, some of the smaller NRSROs have made inroads in certain categories, particularly in asset-backed securities. Two of the smaller NRSROs reported changes in their ownership structures that could create opportunities for growth, according to the report, but barriers continue to exist to gaining market share in some ratings classes.

MainStory: TopStory CreditRatingAgencies DoddFrankAct

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