Last week, the SEC's Inspector General released a report strongly criticizing the agency's oversight of credit rating agencies or "NRSROs." In the report, the Inspector General concludes that the Commission was slow to beef up oversight of NRSROs after the Enron scandals highlighted the need for closer supervision, and following the mandates of the Sarbanes-Oxley Act of 2002 and the Credit Rating Agency Reform Act of 2006.
Overall, our review found that, despite the importance of NRSROs to the U.S. securities market and the Commission's reliance on NRSROs in its rules and regulations, the Commission has historically been slow to to act in this area, even after Enron's bankruptcy and a Senate staff report recommendation that the Commission set specific conditions on the NRSRO designation. While, beginning in 1994, the SEC issued concept releases, conducted examinations, issued reports, held hearings and proposed regulations, it adopted no regulations regarding NRSROs until required to do so after the Rating Agency Act was enacted in 2006. Further, our review identified certain instances of noncompliance with the requirements of the Rated Agency Act or Commission rules, as well as several areas in which we believe the SEC's oversight of NRSROs can be enhanced.
The report, thought critical, does acknowledge that the current chairman, Mary Schapiro has, "identified improving the quality of credit ratings as one of her priorities, directed the Commission staff to explore possible new NRSRO regulations and allocated additional resources to establish a branch of NRSRO examiners."
The Inspector General's report makes twenty-four recommendations to enhance NRSRO oversight, ranging from improvements in the review of applications for NRSRO status and examinations of rating agencies, to tightening regulations to prevent forum shopping on the quality of credit ratings, and other improvements to the NRSRO regulatory regime. The report further requests that the SEC respond to the recommendations, and provide a written plan for strengthening oversight of NRSROs withing 45 days.
The full text of the Inspector General's report is available at: http://www.sec-oig.gov/Reports/AuditsInspections/2009/Report458.pdf