Securities Regulation Daily OCR head discusses NRSRO evolution, future of regulation
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Monday, February 24, 2020

OCR head discusses NRSRO evolution, future of regulation

By Amy Leisinger, J.D.

Ensuring effective internal controls and transparency will continue to promote integrity in the rating process, the director stated.

SEC oversight of nationally recognized statistical rating organizations (NRSROs) has resulted in rating agency improvements in internal controls, governance, and policies and procedures, which bolsters regulatory compliance, according to the SEC Office of Credit Ratings Director Jessica Kane. Markets and rating processes continue to evolve, and OCR examinations uncover issues, but regulators must remain vigilant to ensure the protection of investors, she explained.

OCR efforts. NRSROs came under criticism in the run-up to the financial crisis, Kane noted, and the Dodd-Frank Act took steps to increase public oversight and accountability of credit rating agencies. OCR works to ensure that NRSROs build strong internal compliance programs, according to the director. Most notably, Kane explained, OCR works to ensure that each NRSRO has an effective internal control structure governing their policies, procedures, and methodologies for determining credit ratings and takes into consideration 17 specific factors to make its determination. Each NRSRO also must address and manage conflicts of interest arising from their business, and its board must oversee the firm’s policies and procedures for determining credit ratings, according to the director. With each rating action, an NRSRO must provide certain disclosures, including the methodology used, a description and assessment of the data relied on, and an explanation of potential volatility of the rating, Kane stated.

Examinations. Pursuant to federal law, OCR must examine each NRSRO at least annually for compliance to promote NRSRO responsiveness and accountability. Kane noted that OCR staff prepares an annual examination report to provide information for market participants and investors to evaluate NRSRO regulatory compliance. According to the director, since 2011, 75 percent of essential findings have involved issues with internal supervisory controls, adherence to policies and procedures, and management of conflicts of interest. However, she noted, NRSROs have maintained improvements, and OCR has seen an increase in self-reporting of compliance issues and more frequent communication between NRSROs and staff.

According to Kane, the office also monitors trends and developments in the credit rating industry to inform its risk assessment function for examinations and to develop recommendations for Commission consideration. Flexibility in examinations is limited by the requirement to cover specific review areas in annual exams, and a statutory change would permit OCR to be more responsive to areas of changing risk for each NRSRO, Kane opined. At present, Kane noted that OCR’s risk assessment considers factors including: (1) rating activities, operations, and compliance history; (2) the impact of internal control or compliance failures; and (3) tips and complaints.

In closing, the director requested input on the Commission’s August 2019 release on Rule 17g-5(a)(3) codifying an exemption to the rule for structured finance products issued by non-U.S. issuers in transactions outside the U.S. OCR also is considering whether additional disclosures would lead to more informed investment decisions by retail and institutional investors and make it easier to assess the quality of NRSRO ratings.

"An important part of OCR’s future includes continued engagement with market participants, outside experts, and advisory panels on improvements to regulation and oversight," Kane concluded.

MainStory: TopStory CreditRatingAgencies SECNewsSpeeches

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