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January 22, 2013

SEC Sanctions Credit Rating Agency for False Statements on NRSRO Application

By Rodney F. Tonkovic, J.D.

The SEC has issued a cease-and-desist order against a credit rating agency and its founder for conduct arising out of the agency's application to the Commission to register as a Nationally Recognized Statistical Rating Organization (NRSRO). The respondents were Egan-Jones Ratings Company (EJR), a subscriber-paid credit rating agency, and Sean Egan, its founder. The Commission had approved EJR's application to become registered as an NRSRO for financial institutions, insurance companies, corporate issuers, issuers of asset-backed securities (ABS), and issuers of government securities, municipal securities, or securities issued by a foreign government (In the Matter of Egan-Jones Ratings Company and Sean Egan, January 22, 2013).

The SEC found violations of Sections 15E(a)(1), 15E(b), 15E(h)(1), and 17(a) of the Exchange Act and Rules 17g-1, 17g-2, and 17g-5, which set forth the requirements for applying for registration as an NRSRO and the documentation and recordkeeping requirements for determining credit ratings. EJR, the Commission stated, willfully made misstatements and omissions in order to maintain its registration as an NRSRO in the ABS and government security classes. According to the Commission, EJR made willful and material misrepresentations and omissions in its July 2008 application to register as an NRSRO for issuers of ABS and government securities. In its application, EJR falsely stated the number of outstanding ABS and government issuer ratings it had; the actual number was much lower. EJR also falsely stated that it had been issuing credit ratings in these categories as a credit rating agency on a continuous basis since 1995, when it had only been doing so since 2005.

Additionally, EJR falsely stated in submissions to the Commission that it was unaware whether its subscribers held long or short positions in particular securities, when in fact its salespeople and Egan were aware of certain clients' holdings and whether their positions were long or short. EJR also failed to enforce its policies to address conflicts of interest arising from employee ownership of securities, failed to make or retain records regarding the procedures and methodologies it used to determine credit ratings, and failed to retain records of its outstanding ratings. EJR also failed to retain emails regarding its determination of credit ratings.

The Commission found that Egan made, and caused EJR to make, misstatements in its submissions to the Commission. Egan provided inaccurate information that was included in the applications and annual certifications and then signed and certified the applications despite the fact that he knew, or should have known, that they contained material misstatements and omissions. By failing to ensure that EJR was in compliance with NRSRO rules, Egan caused EJR's violations of the conflicts-of-interest and books and records provisions.

In addition to the cease-and-desist order and a series of agreed-to undertakings, EJR's NRSRO registrations for ABS and government securities were revoked for 18 months. Egan was barred for 18 months from association with any NRSRO registered in the classes of issuers of ABS or issuers of government, municipal, and foreign government securities. Finally, both respondents were ordered to pay a civil money penalty in the amount of $30,000.

Release No. 34-68703


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