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  • SEC Releases Reports on Credit Rating Agencies

    Consumer Finance

    On December 28, the SEC, as required by Dodd-Frank and the 2006 Credit Rating Agency Reform Act, released two annual staff reports on credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs) – the Annual Examination Report and the Annual Report to Congress. The Annual Examination Report reviewed the NRSROs’ (i) policies, procedures, and practices regarding quantitative models used in the rating process; (ii) policies and procedures, controls, and documentation relating to IT and cybersecurity; and (iii) the use of third-party vendors and non-NRSRO affiliates in “determining, issuing, or contributing to the NRSROs’ credit ratings or credit rating processes.” Overall, the SEC noted that the report “shows that all of the NRSROs have enhanced their understanding of their obligations as regulated entities and that at many of the firms, operational improvements made in prior years are being further integrated and enhanced.”

    The simultaneously-released Annual Report to Congress relates to the period from June 26, 2014 to June 25, 2015, and summarizes the SEC’s views on the NRSROs’ state of competition, transparency, and conflicts of interest.

    Dodd-Frank SEC Credit Rating Agencies

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  • SEC to Accept Requests to Vacate Certain Securities Sanctions due to Court Ruling

    Securities

    On October 9, the SEC announced that it would not seek further review of the U.S. Court of Appeals for the District of Columbia’s July ruling prohibiting the SEC from retroactively applying the Dodd-Frank Act’s sanctions provisions to violations occurring before the Act’s effective date. Koch et al. v. SEC, No. 14-1134 (D.C. Cir. Jul. 14, 2015). In addition, the SEC further advised that persons subject to an existing SEC order that may be impacted by the Koch decision, because the conduct involved occurred before the July 22, 2010 effective date of Dodd-Frank, may apply for relief from the Commission’s order.

    Dodd-Frank SEC Credit Rating Agencies

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  • DC Circuit Bars Retroactive Application of Dodd-Frank Act Provisions Permitting SEC to Bar Association with Municipal Advisors and Rating Organizations

    Securities

    On July 14, the U.S. Court of Appeals for the District of Columbia Circuit ruled that Dodd-Frank Act provisions authorizing the SEC to punish certain misconduct by barring association with municipal advisors and rating organizations may not be applied with respect to misconduct that took place prior to the effective date of the provisions. Koch et al. v. SEC, No. 14-1134 (D.C. Cir. Jul. 14, 2015). The Koch appeal arose from an SEC finding that the defendants had violated the securities laws by engaging in a market manipulation practice known as “marking the close,” and the SEC’s imposition of sanctions that, among others, prohibiting Koch from associating with municipal advisors and rating organizations. The DC Circuit upheld the finding of violations, but vacated the part of the order barring Koch from associating with municipal advisors and rating organizations on the basis the relevant Dodd-Frank provisions authorizing that sanction had not been enacted at the time of the misconduct. The court determined that applying those provisions was impermissibly retroactive, as there was no showing that Congress intended the provisions to apply retroactively and because it triggered additional legal consequences not existing at the time of the misconduct. The court did not disturb the other remedial orders in the case, including bars to association with other securities industries.

    Dodd-Frank SEC Credit Rating Agencies

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  • DOJ and State AGs Announce Settlement with Credit Rating Agency

    Securities

    On February 3, the DOJ announced a settlement agreement with a large credit rating agency and its parent company for $1.375 billion – a record amount according to the DOJ – in connection with the agency’s alleged “scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs).” In 2013, the DOJ, along with 19 states plus the District of Columbia, brought the lawsuit against the agency for misrepresenting the securities’ true credit risks through inflated ratings, which led investors to suffer substantial losses right before the financial crisis. While the agency is neither admitting to nor denying the allegations, it has agreed to (i) “retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decision with regard to the credit of the United States;” (ii) abide by the consumer protection statutes set forth by the settling states and DC; and (iii) answer requests from any of the states and DC regarding information on potential violations of the consumer protection laws.

    State Attorney General RMBS DOJ Enforcement Credit Rating Agencies

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  • California Public Employees' Retirement System Settles with Credit Rating Agency

    Securities

    On February 3, the California Public Employees’ Retirement System (CalPERS) announced a $125 million settlement with a large credit rating agency and its parent company to resolve charges made in connection with the agency’s inflated ratings of three structured investment vehicle notes that collapsed during the financial crisis. The CalPERS settlement is separate from the DOJ’s settlement with the same credit rating agency. The state-operated retirement system will collect an additional $176 million from the State of California’s $210 million received from the DOJ settlement, for a total of $301 million.

    Enforcement MBS Credit Rating Agencies

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