SEC staff reports on NRSROs

By R. Jason Howard, J.D.

The SEC has published a report summarizing the staff’s examinations of nationally recognized statistical rating organizations (NRSROs) in which the state of competition, transparency, and conflicts of interest among NRSROs are discussed.

According to the SEC press release, the staff’s NRSRO examinations during 2022 considered factors, including:

• Rating surveillance practices;
• The impact of COVID-19 on commercial real estate credit ratings;
• Whether business communications are conducted through unauthorized means;
• Securities ownership by NRSRO employees;
• The effect on credit ratings from the marketing and development of stand-alone ESG products; and
• Ratings of firms based in China.

In addition to considering the effect of rising interest rates and inflation, the staff’s monitoring efforts also included NRSRO rating activity “related to decentralized finance (DeFi), such as distributed ledger technologies, crypto assets, and smart contracts.”

As stated in the report, as of December 31, 2022, there were ten credit rating agencies registered as NRSROs, categorized as either “large, medium or small” NRSROs. The 2022 examinations generally focused on the NRSROs activities from January 1, 2021, through December 31, 2021, in which the staff considered “material regulatory deficiencies” to be essential findings that involved:

• Conduct or a deficiency that could undermine the quality of a credit rating or impair the objectivity of an NRSRO’s credit rating process; or
• Conduct that may be inconsistent with the anti-fraud provisions of the federal securities laws.

In total, the staff communicated its essential findings to the NRSROs at the conclusion of the 2022 examinations, including:

• nine related to disclosure or reporting issues, implicating Rule 17g-3, Rule 17g-7(a), and Form NRSRO;
• five related to internal control issues, implicating Section 15E(c)(3)(A);
• four related to issues addressing or managing conflicts of interest, implicating Section 15E(h) (1) and Rule 17g-5(c);
• three related to issues regarding the prevention of misuse of material, non-public information, implicating Section 15E(g)(1);
• one related to policies and procedures with respect to credit rating symbols, numbers, or scores, implicating Rule 17g-8(b)(1);
• one related to the production of records to examiners, implicating Rule 17g-2(f); and
• one related to compliance with a prior Commission order.

The staff determined, with some exceptions, that all findings and recommendations from the examinations were appropriately addressed, and that the NRSROs generally engaged in remedial measures such as “adopting new or enhancing existing policies or procedures, internal controls, or systems and processes, and by adding personnel and other resources.”