SEC Finds Conflicts of Interest at Ratings Agencies


The SEC recently issued a report which revealed various conflicts of interest at US ratings agencies including allowing a trade group to impact their ratings criteria, letting senior credit officers review private market share data, and generally failing to follow their published ratings methodology.

Report Background

On December 23, 2014, the SEC’s Office of Credit Ratings issued their fourth annual examination of Nationally Recognized Statistical Rating Organizations.  This report, established as a part of the Dodd-Frank financial reform law, evaluated US ratings agencies’ practices from 2013.

While the report didn’t name specific ratings agencies, it did assess the overall practices of “large firms” (Standard & Poor’s, Moody’s Investors Service or Fitch Ratings) and “small firms” (e.g. AM Best, Egan-Jones Rating Company, Morningstar, DBRS, Inc., etc.).

SEC Chair Mary Jo White explained the purpose of this annual report, “The SEC’s enhanced oversight of NRSROs, informed by risk assessment, regular examinations and policy considerations, provides increasingly robust and effective oversight of the industry, as reflected by overall improvements in compliance, documentation, and board oversight.”


Staff at the SEC’s Office of Credit Ratings made a wide range of recommendations for improvement in various areas at the NRSROs that were reviewed, including:

  • Use of affiliates or third-party contractors in the credit rating process;
  • Management of conflicts of interest related to the rating business operations;
  • Adherence to policies and procedures for determining or reviewing credit ratings.

For example, after reviewing the e-mails at one of the “large raters”, the SEC found that employees on the business side of that firm worked in a concerted fashion to change its ratings criteria to appease one industry trade group.  This was based on business and market share conditions for the ratings agency.

In addition, at one of the “large firms”, the chief credit officer reviewed nonpublic information about its own revenue, financial performance, and market share even though its compliance policies bar these employees from obtaining this information.  This prohibition is to keep agencies from issuing ratings in order to increase market share or generate more revenue.

Also, the SEC found that one large firm and four smaller ratings agencies did not follow their own ratings methodologies.

During the 2014 examinations, the SEC staff observed marked improvements at the NRSROs versus prior years in a range of areas, including:

  • Compliance resources, monitoring, and culture;
  • Documentation and resources for criteria and model validation;
  • Document retention;
  • Board of directors or governing committee oversight.

“The findings and recommendations in the 2014 examination report demonstrate the impact of rigorous oversight by the SEC and regular examinations by the Office of Credit Ratings,” said Thomas J. Butler, Director of the SEC’s Office of Credit Ratings.

Integrity’s Take

The results of the SEC’s 2014 report revealed that, while the ratings agencies are becoming more rigorous about a number of compliance issues, they are continuing to struggle in a few areas related to conflicts of interest.

Obviously, US ratings agencies will need to continue to try to transform both their culture and practices in order to regain the trust and credibility they once had among financial market participants.  Unfortunately, rebuilding this trust is not something that will be accomplished overnight.


About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email:

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