Credit rating agencies are facing constructive criticism from the U.S. Securities and Exchange Commission (SEC). Recently, the rating agencies have been in news for providing inaccurate information about some securities to some clients. Now the market watchdog criticized a rating agency for approving the application of another agency, even though the former rating agency was suspicious about the authenticity of the financial information.

The SEC Inspector General David Kotz showed concern over this issue and expressed doubts about whether this could have been done in the public interest. SEC did not disclose the name of the rating agencies involved in this issue. Eleven big rating agencies including Moody’s Corp. (MCO), McGraw-Hill Company Inc. (MHP) and Standard & Poor’s are registered with the SEC and one of the eleven agencies may very well be involved in it.

On the other hand, SEC staff identified other credit rating agencies, whose applications were approved in spite of SEC having some doubts about them. The market watchdog SEC explained that it will be taken care of after the process of approval is over. We believe that the SEC should have a fixed set of policies, which can clearly fix the parameter of approval and non-approval and there should be sufficient clarity about it. Although SEC has an answer to this and states that there should be enough legal and factual evidence to reject an application.

The SEC made a number of recommendations to control the errors made by the credit rating industry, which includes credit rating agency auditors to be monitored by the Public Company Accounting Oversight Board. The global policymakers are moving in the same direction. We believe this will slowly translate into, more stringent review process and will make things a bit more difficult for rating agencies. While they continue to be protected by the right of freedom of speech and opinion, they will have to pay more attention to misrepresentation or improper representation of facts because this is the area that could increase unwanted criticism.

Zacks Investment Research
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