MercoPress. South Atlantic News Agency

US regulator says it has discovered ‘apparent failures’ at 10 credit rating agencies

The agencies were accused of having conflicts of interest, because they were paid by the banks that sold the debt.

The United States Securities and Exchange Commission (SEC) has discovered “apparent failures” at 10 credit rating agencies. SEC said it was concerned that the agencies - including Standard & Poor's (S&P) and Moody's - were not making timely and accurate disclosures or managing conflicts of interest.

The SEC said it expected the agencies to “address the concerns”.

Credit rating agencies have been criticised for their role in the financial crisis that started in 2007. This is because a root cause of the crisis was the bad US mortgage debt that was resold around the world, debt that was given top credit ratings by the agencies.

The agencies were accused of having conflicts of interest, because they were paid by the banks that sold the debt.

The three largest credit rating agencies are S&P, Moody's and Fitch

SEC did not directly link specific failings to specific agencies, but it said that two of the big three did not have specific policies in place to manage conflicts of interest where they rated financial products issued by banks in which the agencies were large shareholders.

The SEC said that one of the three largest agencies was not correctly following rating methodologies.

It said the agency in question was slow to discover, disclose and fix the methodology errors, and may have let business interests influence its mistakes. It added that its findings did not constitute a “material regulatory deficiency” at the SEC.

“We expect the credit rating agencies to address the concerns we have raised in a timely and effective way, and we will be monitoring their progress as part of our ongoing annual examinations,” said Norm Champ, deputy director at the SEC Office of Compliance, Inspections and Exam

SEC was given more powers to regulate credit rating agencies in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in July of last year.

The other credit rating agencies covered in the SEC annual report are AM Best, DBRS, Egan-Jones, Japan Credit, Kroll Bond, Morningstar, and Rating and Investment Information.

S&P downgraded the US's credit rating in August by one notch from AAA to AA+. Explaining the move, it said the government was not doing enough to reduce the country's budget deficit.