MercoPress. South Atlantic News Agency

“Conflicts of interest” proven in three credit rating agencies

A report into the much-criticized activities of credit rating agencies has found conflicts of interest at the firms it studied. The US financial regulator, the SEC, found that the firms, which rate investments, had broken its rules.

It began looking into their work after they gave positive ratings to sub-prime related investment products whose value later slumped. The agencies are now implementing better procedures, the SEC said. Fitch Ratings, Moody's and Standard & Poor's - the three agencies investigated by the Securities and Exchange Commission - were paid to determine credit ratings of products by the companies issuing those securities. In breach of SEC rules, the inquiry found that the three firms had failed to ensure analysts were kept away from fee negotiations so that they could not be influenced to give a more positive rating. "While each rating agency has policies and procedures restricting analysts from participating in fee discussions with issuers, these policies still allowed key participants in the ratings process to participate in fee discussions," the SEC report said. It identified cases at two of the three firms where analysts or their supervisors were directly involved in fee negotiations. Procedures at both firms have since been changed, the SEC said. Only one - unnamed - ratings agency actively monitored compliance to ensure against conflict of interest, the report said, so it was able to detect "certain shortcomings". Reacting to this and the report other findings, Standard and Poor's said it was taking "27 specific steps in hopes of restoring confidence in the ratings process, and to address issues of relevance and transparency". "Standard and Poor's is fully committed to increased openness and transparency, and building on the reforms we announced in February, we look forward to taking any additional steps needed to improve our processes and ensure they are of the highest quality," said S&P spokesman Ed Sweeney. Fitch's managing director David Weinfurter said it had abided by its code of conduct, which "was designed to maintain the integrity of Fitch's analytical processes and to manage conflicts of interests". "Fitch is currently in the process of updating its policies, procedures and code," Mr Weinfurter added. Moody's could not be reached for a comment. The Commission began its investigation into the three major credit rating agencies in August last year to "review their role" in the financial turmoil which followed the collapse of the US sub-prime mortgage market. Lawmakers and some investors have criticized the agencies for giving upbeat assessments of investments made up of bundles of debt that included sub-prime mortgages. Higher interest rates squeezed these mortgage holders' abilities to meet their repayments, triggering heavy losses on the investments they were linked to. Billions of dollars have been wiped off bank balance sheets as a result. (BBC).-