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Credit Rating Agencies Get Whitewashed SEC Report For Christmas

SEC Releases Report on Credit Rating Agencies On Christmas Eve, And It Doesn't Say Much.

by Daniel Johnson

Occupy Homes is one of many citizens initiatives that have sprung up to help communities cope with the economic disaster that could happen again soon since no major changes have been made.
Occupy Homes is one of many citizens initiatives that have sprung up to help communities cope with the economic disaster that could happen again soon since no major changes have been made.
SEC Issues Whitewash Report on Credit Rating Agencies On Christmas Eve.
The US Securities Exchange Commission chose Christmas Eve to release it's report on the Nationally Recognized Statistical Rating Organizations (NRSROs) used by all major banks. 
Major reforms of credit rating agencies were supposed to have been undertaken over the past several years since they played a role in the financial collapse of 2008, but
the reforms have been less than far reaching. 
Between 2000-2008 the credit rating agencies played a major role in creating the market bubble that led to the financial crisis. 
NRSROs make a great deal of their profit from 
The agencies made massive profits from the subprime mortgage crisis by rating collateralized debt obligations and securities back by residential mortgages, which determined how the banks sold the securities.
One of the major flaws in the system, that has yet to be changed, is the 'issuer pays' system in which whoever is issuing the security pays the credit rating organization, which is an obvious source or corruption but is necessary because they can't base their income on a subscription because people would get it free on the internet, and someone has to pay, and having government regulate directly would be against free market principles, at least according to the industry who appear to be the only people the SEC feels are qualified to advise on how to regulate them. 
The ongoing lack of any real change is a very disappointing present to a world still feeling the effects of the collapse 5 years ago. 
The SEC has debated and discussed meaningful reforms of every aspect of the system since 2008, with little forward momentum until recently, with the introduction of the The Volcker Rule earlier this year. 
The Volker Rule is supposed to prohibit proprietary trading by government backed banks, but according to Occupy The SEC, "The final Volcker Rule’srestriction on proprietary trading remains subject to numerous exemptions and loopholes.  Forinstance, the Final Rules clarify statutory exemptions for permitted activities, including marketmaking, underwriting, hedging, trading in certain government obligations, and organizing andoffering a hedge fund or private equity fund, among others."
The complete press release from SEC: 
SEC Issues Annual Staff Reports on Credit Rating Agencies
2013-272 Washington D.C., Dec. 24, 2013 — The Securities and Exchange Commission today issued its annual staff report on the findings of examinations of credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs).  The agency also submitted an annual staff report on NRSROs to Congress.
“The two reports reflect an evolving industry,” said Thomas J. Butler, director of the SEC’s Office of Credit Ratings.  “The examination report shows that the SEC’s vigilant oversight is improving compliance at NRSROs, while the annual report to Congress depicts an industry that is growing more competitive and transparent.”
The 2010 Dodd-Frank Act requires the SEC to examine each NRSRO at least annually and issue a report summarizing key findings of the examinations.  The report discusses the staff’s findings and recommendations for each of the 10 NRSROs.  Among the areas examined are whether each NRSRO conducts business in accordance with its policies, procedures, and methodologies as well as how an NRSRO manages conflicts of interest and whether it maintains effective internal controls.
The report noted, for instance, that the staff found one or more NRSROs lacked comprehensive procedures governing ratings placed under review.  The staff also found that oversight of the process for developing new rating methodologies and criteria was not sufficient at one or more NRSROs to ensure independence from business and market share considerations. 
The 2013 examination report highlights certain improvements among NRSROs, such as increased investment in compliance systems and infrastructure along with enhancements in compliance training for both analytical and non-analytical employees.  These improvements address recommendations that the staff made to NRSROs on prior examinations.
The annual report to Congress, which is required by the 2006 Credit Rating Agency Reform Act, identifies the applicants for NRSRO registration, actions taken on the applications, and the SEC’s views on the state of competition, transparency, and conflicts of interest among NRSROs.
Observations from the 2013 annual report include the following:
The number of NRSROs rose to 10 with HR Ratings de México, S.A. de C.V., registering in November 2012.
Some smaller NRSROs have gained significant market share in ratings for certain types of asset-backed securities.
Transparency is increasing due to the NRSROs issuing unsolicited commentary on ratings issued by other NRSROs.
The following SEC staff made significant contributions to the examinations and reports: Abe Losice, Michele Wilham, Kenneth Godwin, Natalia Kaden, Harriet Orol, Jacob Prudhomme, Diane Audino, Kristin Costello, Scott Davey, Shawn Davis, Michael Gerity, Julia Kiel, Joanne Legomsky, Russell Long, Carlos Maymi, David Nicolardi, Sam Nikoomanesh, Joseph Opron, Abraham Putney, Mary Ryan, Warren Tong, Evelyn Tuntono, and Kevin Vasel.

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