SEC Slaps Credit Rating Agencies With Fines Totaling $49 Million in Ongoing Crackdown on Private Electronic Communications

The U.S. Securities and Exchange Commission yesterday brought charges against six nationally recognized statistical rating organizations, or NRSROs, for significant failures by the firms and their personnel to maintain and preserve electronic communications – primarily in regards to their employees’ use of text messaging and messaging apps.

According to the SEC, the firms admitted the facts set forth in their respective orders; acknowledged that their conduct violated recordkeeping provisions of the federal securities laws; agreed to pay combined civil penalties of more than $49 million; and have begun implementing improvements to their compliance policies and procedures to address these violations.

• Moody’s Investors Service, Inc. agreed to pay a $20 million civil penalty;
• S&P Global Ratings agreed to pay a $20 million civil penalty;
• Fitch Ratings, Inc. agreed to pay an $8 million civil penalty;
• HR Ratings de México, S.A. de C.V. agreed to pay a $250,000 civil penalty;
• A.M. Best Rating Services, Inc. agreed to pay a $1 million civil penalty; and
• Demotech, Inc. agreed to pay a $100,000 civil penalty.

Each of the credit rating agencies, with the exception of A.M. Best and Demotech, is also required to retain a compliance consultant. The SEC said that A.M. Best and Demotech engaged in significant efforts to comply with the recordkeeping requirements relatively early as registered credit rating agencies and otherwise cooperated with the Commissions’ investigations, and, as a result, they will not be required to retain a compliance consultant under the terms of their settlements.

“We have seen repeatedly that failures to maintain and preserve required records can hinder the staff’s ability to ensure that firms are complying with their obligations and the Commission’s ability to hold accountable those that fall short of those obligations, often at the expense of investors,” said Sanjay Wadhwa, deputy director of the SEC’s enforcement division. “In today’s actions, the Commission once again makes clear that there are tangible benefits to firms that make significant efforts to comply and otherwise cooperate with the staff’s investigations.”

Each of the six firms was charged with violating Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17g-2(b)(7) thereunder. In addition to significant financial penalties, each credit rating agency was ordered to cease and desist from future violations of these provisions and was censured. The four firms ordered to retain compliance consultants have agreed to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on their personnel’s personal devices and their respective frameworks for addressing non-compliance by their personnel with those policies and procedures.

In recent parallel crackdowns and as previously reported by The DI Wire, Ameriprise Financial Services LLC, Edward D. Jones & Co., L.P., and LPL Financial LLC were among 26 broker-dealers, investment advisers, and dually registered broker-dealers and investment advisers that the SEC charged with widespread and longstanding electronic and communications recordkeeping failures.

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