SEC says rating agencies need to take action on CDO and RMBS ratings

The SEC has published findings from its 10-month investigation into CDO and RMBS ratings practices. The US regulator says it has uncovered significant weaknesses in ratings practices and says the agencies need to take remedial action to make ratings more meaningful and provide better disclosure.

The report says that rating agencies have struggled significantly with the increase in the number and complexity of subprime RMBS and CDOs since 2002. It says that none of the rating agencies had specific written comprehensive procedures for rating RMBS and CDOs. Also, significant aspects of the rating process were not always disclosed or even documented by the firms. In addition, the SEC charges the agencies with mishandling conflicts of interest.

"When the firms didn't have enough staff to do the job right, they often cut corners,” says SEC chairman Christopher Cox. ”That's the bad news. There's also good news. And that's that the problems are being fixed in real time.”

Remedial actions “recommended” by the SEC include better documentation of procedures and regular reviews to ensure that the rating agencies have enough resources devoted to surveillance. The report also recommends that the rating agencies seek ways to mitigate and manage the “issuer pays” conflict of interest, but the SEC stops short of telling the rating agencies to change their business model of charging each issuer for ratings.