An SEC report cautioned credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.  The SEC's Report of Investigation stems from an Enforcement Division inquiry into whether Moody's Investors Service, Inc. (MIS), the credit rating arm of Moody's Corporation, violated the registration provisions or the antifraud provisions of the federal securities laws.

    MIS Case Involves Uncertain Jurisdiction.   Because of uncertainty regarding a jurisdictional nexus between the U.S. and the relevant ratings conduct, the SEC declined to pursue a fraud enforcement action in this matter.  Nevertheless, the Report notes that an MIS analyst discovered in early 2007 that a computer coding error had upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for certain constant proportion debt obligation notes.  Notwithstanding that discovery, an MIS rating committee shortly thereafter voted against taking responsive rating action, in part because of concerns that doing so would negatively impact MIS's business reputation.  And in June 2007, MIS applied for registration as an NRSRO.  This action, the SEC notes, constituted conduct that was contrary to the MIS procedures used to determine credit ratings as described in the MIS application to the SEC.  

    SEC Conclusions.   The SEC makes clear that credit rating agencies registered with the SEC must implement and follow appropriate internal controls and procedures governing their determination of credit ratings, and must also take reasonable steps to ensure the accuracy of statements in applications or reports submitted to the SEC.  The Report cautions NRSROs that, when appropriate, the Commission will pursue antifraud enforcement actions against deceptive ratings conduct, including actions pursuant to the Dodd-Frank Act provisions re: conduct that physically occurs outside the U.S. but involves significant steps or foreseeable effects within the U.S. 

David Frohlich, Margaret Cain, Roger Paszamant, Dean Conway were cited as having conducted the SEC's investigation.  For further details, refer to or click onto:   [SEC PR 10-159, 8/31]   [ SEC Report of Investigation Release No. 62802, 8/31 ]