An SEC report on credit rating agencies found that the NRSROs appear to be trending even more toward employing the issuer-pay business model. Of the ten registered NRSROs, seven—including the three larger NRSROs—operate predominantly under the issuer-pay model. The remaining three have historically operated predominantly under the subscriber-pay model. However, the SEC found that two of the subscriber-pay NRSROs have recently taken steps to focus more on issuer-pay business. Even more, this new focus on the issuer-pay model appears to be occurring with respect to ratings of asset-backed securities.
There are two business models used by the NRSROs. Under the issuer-pay model, the NRSRO receives compensation from obligors for rating the obligor or securities issued by the obligor. Under the subscriber-pay model, subscribers pay the NRSRO for access to the NRSRO’s ratings.
The report notes that despite changes by some of the examined credit rating agencies to improve their operations, Commission staff identified concerns at each of the NRSROs. These concerns included apparent failures in some instances to follow ratings methodologies and procedures, to make timely and accurate disclosures, to establish effective internal control structures for the rating process and to adequately manage conflicts of interest. The report notes that the staff made various recommendations to the NRSROs to address the staff’s concerns and that in some cases the NRSROs have already taken steps to address such concerns.
“This report demonstrates the SEC’s enhanced oversight of credit rating agencies,” said Carlo V. di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE). “We have recruited experts and strengthened the overall monitoring and examination process to better protect investors, ensure market integrity, and facilitate capital formation.”
The Commission staff conducted the examinations as required by the Dodd-Frank Act, which imposed new reporting, disclosure and examination requirements to enhance the regulation and oversight of NRSROs. Among other things, the Dodd-Frank Act requires the Commission staff to examine each NRSRO at least annually and issue an annual report summarizing the essential findings of the examinations.