The U.S. Securities and Exchange Commission issued a report Tuesday cautioning credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.

The SEC’s report stems from an enforcement inquiry into whether Moody’s Investors Service, Inc. violated the registration provisions or the antifraud provisions of the federal securities laws. The SEC said that it declined to pursue a fraud enforcement action “because of uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct”.

Nevertheless, in the report, the SEC makes clear that credit rating agencies must implement and follow appropriate internal controls and procedures governing their determination of credit ratings, and must also take reasonable steps to ensure the accuracy of statements in applications or reports submitted to the SEC.

“Investors rely upon statements that [credit rating agencies] make in their applications and reports submitted to the commission, particularly those that describe how [they] determines credit ratings,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “It is crucial that [CRAs] take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings.”

The report warns that the SEC will pursue antifraud enforcement actions against deceptive ratings conduct.


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