In an Annual Report, the SEC Office of Credit Ratings ("OCR") examined the state of competition among nationally recognized statistical rating organizations ("NRSROs"); in a related summary report, the OCR reviewed NRSRO examinations.

The OCR 2020 Annual Report to Congress on NRSROs presented findings regarding:

  • Competition. The OCR stated that simply comparing the number of ratings outstanding between established and newer NRSROs may not provide a comprehensive picture of the state of competition. Since 2012, the OCR has observed continued growth for smaller NRSROs in the asset-backed securities ("ABS") rating category; as of December 31, 2019, smaller NRSROs collectively have 22.6 percent of such outstanding ratings. In particular, the OCR found that while larger NRSROs obtained the highest market shares in rating non-agency U.S. commercial mortgage-backed security transactions, smaller NRSROs have gained market share in ratings for ABS backed by newer and esoteric assets. However, the OCR noted that investment management contracts and investment guidelines that require the use of specified rating agencies present a barrier to entry for smaller NRSROs.
  • Transparency. The OCR highlighted NRSRO publications following the COVID-19 pandemic on the potential credit and rating impacts.
  • Conflicts of Interest. The OCR compared the conflicts of interest that arise from the NRSRO "issuer-pay" model and the "subscriber-pay" model, highlighting SEA Rule 17g-5(a)(3) ("Conflicts of interest"), which allows an exemption for credit ratings of structured finance products where the issuer is a non-U.S. person and such products will be offered and sold outside the United States. The OCR noted that the SEC is examining the effectiveness of such rule for structured finance products that are not eligible for the exemption, and has invited input from interested parties.

In the 2020 Summary Report on Examinations of Each NRSRO, the OCR reviewed NRSROs' adherence to SEA Section 15E ("Registration of nationally recognized statistical rating organizations") and Rules 17g-1 to 17g-10 ("Nationally Recognized Statistical Rating Organizations"). Through its general risk assessment process, the OCR examined the NRSROs' handling of certain areas, including (i) the COVID-19 pandemic, (ii) environmental, social and governance factors and products, (iii) collateralized loan obligations, (iv) conflicts associated with investor-paid ratings, (v) the LIBOR phase-out and (vi) treatment of low-investment grade corporate securities. In an overall positive review, the OCR found that all recommendations from the 2019 Section 15E examinations have been appropriately addressed by NRSROs. The OCR recommended further areas of improvement related to policy and methodology adherence, management of conflicts of interest, internal supervisory controls, corporate governance, complaint management, and post-employment "look-back" policies.

Primary Sources

  1. SEC Press Release: SEC Releases 2020 Office of Credit Rating Reports
  2. SEC Report: Annual Report to Congress on Nationally Recognized Statistical Rating Organizations - June 26, 2019 - November 30, 2020
  3. SEC Report: 2020 Summary Report of Commission Staff's Examinations of Each Nationally Recognized Statistical Rating Organization

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