Which Credit Rating Agency Provoked SEC "Suspicion"?

The federal government's campaign to tighten the regulatory vice-grip on credit rating agencies (CRO's) intensified yesterday, when the SEC's Inspector General released a report which criticized the very process by which the SEC qualifies and approves those companies designated as Nationally Recognized Statistical Ratings Organizations (NRSRO). The 124 page report featured numerous redaction's, the majority of which seemed to be for the purpose of concealing the identity of one rating's firm in particular. This firm, whose name is as of yet unknown, was discussed in the Inspector's report in the context of SEC "suspicions" regarding the information contained on it's application to become a NRSRO. According to the report, these suspicions pertained to "the accuracy of the financial information provided in its (the secret CRA) application and concerns about the authenticity of a number of certifications". Interestingly, the SEC chose to approve this organization's application prior to any sort of an investigation into the merits, if any, behind these internal "suspicions". In other words, the ratings firm in question is conducting business at this time. Now, for reasons likely based in my own naive/idealistic opinions regarding the need for transparency at all levels of government, I would like to know the identity of this NRSRO.

The Wall Street Journal has already conducted an initial round of leg-work on this issue, mentioning that the SEC's report reveals that the troubled firm is funded by subscriber-fees. With this knowledge in hand, we can apparently rule out S&P, Moody's and Fitch - all three of these major NRSRO's are compensated by the Company whose debt/securities are being reviewed. With the three market share leaders ruled out, the question becomes: who is left?

According to the SEC's website, ten separate companies have received commission orders granting NRSRO registration. Three of those ten have been ruled out, leaving the following seven as potential candidates:

• Egan-Jones Rating Company
• Realpoint, LLC
• LACE Financial Corp.
• A.M. Best Company, Inc
• DBRS Ltd.
• Japan Credit Rating Agency Ltd.
• Rating and Investment Information, Inc.

Based upon the NRSRO registration orders, both Realpoint and LACE Financial Corp. had to cross an extra hurdle with the SEC prior to receiving their respective designations. In both instances, the firms had to convince the SEC to be lenient in it's application of a regulation which prohibits an NRSRO from receiving greater than 10% of it's revenue from a single client; the obvious implication here is that, above that 10% threshold, a client could wield undue influence on the ratings firm, possibly compromising the independence of the rating decision. It appears that both CRA's were able to circumvent this requirement by asserting that "the 10% client" (SEC documents didn't reveal the identify of these firm's largest client) would only represent ~7% of revenue in the year immediately following NRSRO designation. I'm not sure this specific issue fits the description of the SEC's suspicions from the report; it also appears that the SEC conducted it's due diligence with regards to Realpoint and LACE - an action that was notably not taken insofar as the single suspicious NRSRO is concerned.

A review of the remaining CRA's will take a little more time than I have today, so this will have to be followed up with a more detailed analysis. I will say that it's unlikely A.M. Best is the source of SEC angst, as they have been around for 100 years or so. Anyone with any ideas about this can shoot me an email; the address can be found by following the "view my complete profile" link on the right-handed side of this page.

*no position in any credit rating agency, NRSRO, or their parent or affiliated companies. Sphere: Related Content