Report cites flaws at credit rating agencies

WASHINGTON -- U.S. securities regulators say their first annual review of the nation's credit rating agencies finds the companies aren't doing enough to protect their own financial integrity.

The Securities and Exchange Commission report released Friday was mandated by the sweeping financial industry reforms passed last year.

Regulators examined 10 credit rating agencies, including the three largest: Standard & Poor's, Moody's and Fitch.

The report didn't specifically identify which of the credit rating agencies suffered the most troubling weaknesses.

But it chastised the 10 agencies for a series of problems, including inadequate controls over employee conflicts of interest.

Regulators also found the companies sometimes didn't even follow their own procedures.

Some examples cited in the report:

* The agencies had inadequate policies to prevent conflicts that arose when analysts and agency employees own stock in companies they rated

* Two of the three big agencies didn't have specific policies to prevent such conflicts when a company they rated held a substantial stake in their agency.

* One agency failed to follow its own formulas for rating securities.

* Another delayed informing investors about changes in its formulas.

The SEC staff conducted its examination from December 2009 through August 2010. The SEC hasn't determined if any of the findings represent a significant breach of regulations, but the report left that possibility open for future action.

Despite improvements made by some since a previous examination in 2008, there are still problems at all of them, including failures in some cases to follow their own policies, the report said.

The three big agencies have been blamed for helping fuel the 2008 financial crisis by giving high ratings to risky mortgage securities. Those investments later soured when the housing market went bust.

Critics say the agencies have a built-in conflict of interest because they are paid by the same companies they rate.