Credit rating agencies Moody’s and S&P Global Ratings have been hit with substantial fines by the Securities and Exchange Commission (SEC) for “significant recordkeeping failures.” The SEC found that the agencies violated the Securities Exchange Act, which requires them to retain all communications related to rating activities. Moody’s was found to have used personal mobile devices and messaging platforms like WhatsApp to discuss credit ratings, failing to preserve these messages as required by law.
As a result, Moody’s and S&P Global Ratings will each pay $20 million in civil penalties, while Fitch Ratings will pay $8 million, AM Best $1 million, HR Ratings de Mexico $250,000, and Demotech $100,000. In addition to the fines, the agencies have been ordered to never violate the recordkeeping provisions again.
AM Best, one of the agencies involved, expressed its satisfaction with the resolution of the matter, emphasizing its commitment to regulatory responsibilities and maintaining the integrity of its ratings process. S&P Global also acknowledged the SEC’s order, highlighting its remedial actions and cooperation with the SEC staff.
To ensure compliance going forward, four of the agencies (excluding AM Best and Demotech) will be required to retain compliance consultants. AM Best and Demotech were exempted from this requirement due to their early efforts to adhere to recordkeeping requirements and cooperation with SEC investigations.
The SEC’s Deputy Director of Enforcement, Sanjay Wadhwa, emphasized the importance of maintaining and preserving required records, stating that failures in this area can hinder the SEC’s ability to ensure compliance and hold firms accountable. However, the SEC also recognized the benefits of firms that make significant efforts to comply and cooperate with investigations.
Credit rating agencies have faced doubts regarding their value since the 2008 financial crisis when they failed to identify and warn about the risks of mortgage-backed securities. However, a Harvard Business School study analyzing ratings issued between 2003 and 2015 found that agencies have improved their performance since the crisis. The study suggests that agencies are now more cautious and provide more accurate and relevant ratings for investors to avoid high-profile failures.
Overall, this case highlights the importance of proper recordkeeping in the credit rating industry. The fines imposed by the SEC serve as a reminder to agencies to adhere to regulatory requirements and ensure transparency in their rating activities. The involvement of compliance consultants for some agencies signifies a commitment to improving processes and avoiding future violations. Despite past criticisms, recent studies indicate that credit rating agencies have made efforts to enhance the accuracy and relevance of their ratings, aiming to protect investors and maintain market integrity.
