SEC Releases Annual Report on Rating Agencies
February 6, 2023
On February 2, the Securities and Exchange Commission (SEC) issued its annual report on nationally recognized statistical rating organizations (NRSROs).
Why it matters: The 2006 Rating Agency Act and Section 15E(p)(3)(C) of the Securities Exchange Act of 1934 require the SEC to submit an annual report to the Senate Banking and House Financial Services committees and the public.
The SEC identified the following potential risks for consideration in the NRSRO-specific risk assessments:
- Pressure on surveillance practices during times of stress;
- Pandemic’s impact on commercial real estate;
- Increased likelihood that communications are conducted through unapproved means (e.g., text messaging);
- Process weaknesses in managing conflicts of interest with respect to securities ownership by employee;
- Marketing and development of stand-alone ESG products resulting in conflicts of interest that could affect credit ratings; and
- Developments that could adversely affect the ratings of firms based in China.
On CRE, the report noted “identified potential risks relating to commercial real estate ratings with significant exposure to sectors negatively impacted by COVID-19, and potential non-adherence to methodologies and rating processes” related to:
- Qualitative adjustments made to model implied ratings, model implied subordination levels, and inputs to models used in the ratings process;
- Property valuations; and,
- Default frequency and severity assumptions or projections.
Contact Sairah Burki (sburki@crefc.org) with questions.