SEC Investigates Credit-Rating Firms for Contributing to Financial Collapse

(June 17, 2011) — The Securities and Exchange Commission (SEC) is considering charges against credit-rating agencies for their role in developing mortgage-bond deals that contributed to financial collapse.

SEC officials are focusing their attention on whether ratings companies committed fraud, the Wall Street Journal reported, noting that they failed to do sufficient research to properly rate subprime mortgages. The SEC is reviewing the conduct of companies including McGraw Hill’s Standard and Poor’s and Moody’s Investors Service, owned by Moody’s Corp, on at least two mortgage-bond deals.

While banks and brokerage partners have been the focus of charges and regulatory reforms, ratings firms have been successful in largely dodging such levels of scrutiny until now. The recent inquiry into ratings firms broadens the SEC’s probe into the sales and marketing of mortgage-bond deals.

Last year, in the wake of the financial crisis, the SEC disclosed that it was working on heightening enforcement actions against major Wall Street firms. The August 2010 announcement by the regulator came on the heals of the SEC’s $550 million settlement with Goldman Sachs in a civil fraud case after the banking giant failed to disclose conflicts of interest in mortgage investments it sold as the housing market was waning. The bank did not admit to any wrongdoing.

The SEC has being widely criticized for not enforcing greater oversight after the 2008 financial crisis. The regulator has asserted that high-profile cases similar to the Goldman suit are ongoing, handled by the agency’s enforcement division.