A decade since the global financial crisis, the U.S. securities regulator is still struggling to get a grip on the country's rating agencies because it lacks the tools and expertise needed to crunch growing reams of ratings data, people familiar with the effort say.
In the wake of the crisis, Congress charged the Securities and Exchange Commission (SEC) with overseeing Moody's, Standard & Poor's (S&P), Fitch and others, whose inflated ratings of mortgage-backed securities helped fuel the U.S. housing bubble.
The 2010 Dodd-Frank financial reform law required the SEC, among other measures, to gather data and assess rating firms' actions so it could spot problems that might cause another crisis.
But five current and former staff at the SEC's Division of Economic and Risk Analysis (DERA) responsible for the task, told Reuters insufficient resources and technology challenges have hampered their ability to deliver such analysis.
"Despite a clear mandate in the Commission’s own rulemaking, there are still tons of questions about the lack of analysis the SEC is doing to credit rating agencies," said Kimberly Earle, a former associate chief accountant and team leader at the division who left the SEC in September.
In a statement, a SEC spokeswoman said the agency had "generally resolved" its data management problems and that its credit rating division drew on many departments in addition to DERA.
Ratings agencies remain central to the financial system, with their views on the quality of thousands of securities hardwired into rules and relied upon by investors globally.
For investors and regulators, better information on how ratings are awarded may help them spot flawed assumptions or data quality issues that could mask risks.
Governance advocates say such transparency is essential because the SEC has allowed firms to maintain the "issuer pays" model, which critics say is riddled with conflicts.
With interest rates rising and record levels of leveraged lending, some investors are already warning that corporate ratings, even among blue-chip companies, are looking too rosy.
In 2009, the SEC initially required the country's 10 registered ratings firms to submit monthly data on all their ratings changes via the SEC's main electronic filing system also used for public company and fund filings.
Within months, however, the agency allowed firms to submit smaller self-selected samples because the system could not handle the enormous volume of data involved.
Two years later, though, the SEC concluded those samples were not enough to be meaningfully assessed. Rather than return to the previous system, it ordered rating firms to publish all ratings changes on their websites so that investors, and the SEC, could evaluate them. The SEC committed to replicating the data on its website too.
Until now, however, several firms including Moody's, S&P and Fitch, have failed to consistently publish ratings changes, SEC emails and an independent Reuters analysis of a sample of firms' disclosures dating back to 2014 show.
Internal SEC emails from 2014 to 2017 seen by Reuters show SEC staff at DERA and the Office of Credit Ratings (OCR) were aware of the gaps but there was internal debate as to which department should address the issue.
An SEC report on examinations of ratings firms published on Tuesday highlighted at least 20 transparency compliance failures by both small and large firms, including disclosure of inaccurate, misleading or incomplete information on how they arrived at their ratings.
Since 2011, the SEC has only brought one enforcement action against a rating firm for operational failures, according to public records.
The SEC's website also does not fully replicate the rating agency data, Reuters found.
"This type of collection process doesn't go far enough," said Jeff Harris who led the SEC'S DERA office until June. In a statement, a spokesman for S&P said the agency believed regulations had strengthened its internal processes and risk management and that its ratings and rationales are publicly available for free. S&P declined to comment on gaps Reuters identified in those disclosures.
Fitch said it complied with all relevant credit rating laws.
A spokesman for Moody's said in a statement: “Moody’s takes all of its regulatory obligations seriously, and we fully comply with the disclosure requirements."
Several resource-strapped regulators, some of whom have seen their funding decline under the Trump administration, have struggled with the vast amount of data they are required to analyze under post-crisis rules, say regulatory experts. The SEC also warns investors not to base decisions solely on ratings.
But financial experts and investors say insufficient disclosure makes it hard, for example, to detect ratings inflation and poses a broader risk. The SEC should address that by demanding better rating agency disclosures, dedicating more staff to analyzing the data, and getting tough with those who fail to comply, they say.
"If the agency would dedicate the effort to measure those ratings, the market indicators for a crisis would be clearer," said Alice Rivlin, of Washington think tank Brookings Institution and a former Federal Reserve vice-chair.
Canada-based DBRS firm last year rekindled fears ratings may still be too lenient when it downgraded 293 AAA commercial mortgage bonds after reviewing its methodology.
A DBRS spokesman said the methodology change did not come as a surprise to the market.
In recent years, investors and academics have voiced skepticism over bullish ratings on securities ranging from mortgage bonds to municipal and sovereign debt. Most recently ratings of debt issued by firms to finance mergers have come under scrutiny, with analysts and investors saying some of their assumptions around debt repayments and revenue growth may have been too optimistic. Rating agencies say they assess multiple other factors beyond leverage when assigning ratings.
In a paper published last year, Frank Partnoy, professor of law and finance at University of San Diego, warned that a lack of oversight and accountability, paired with an over-reliance on ratings in general, had allowed rating methodologies to "remain flawed, overly simplistic, nonsensical, and arbitrarily subjective.”
For example, when assessing competitive risk factors, some rating firms had grouped companies as diverse as casinos, aerospace and home furnishings into the same industry category, Partnoy noted.
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