The SEC's Office of Credit Ratings ("OCR") examined Nationally Recognized Statistical Rating Organizations ("NRSROs") in its annual Staff Report for 2021.
The report provided the staff's review of NRSROs and focused on key subjects, including competition, transparency and conflicts of interest among the organizations. OCR's examination program examined and reported on eight areas mandated by statute, along with Environmental, Social and Governance ("ESG") considerations, COVID-19-related risks, and the treatment of a variety of different types of securities, including collateralized loan obligations, commercial real estate, consumer asset-backed securities, low-investment-grade-rated corporates and municipals.
The discussion of the NRSOs rating of ESG-related products is the most notable addition to the annual report, as the topic was nowhere mentioned in the prior report published in January 2020. The SEC found that rating agencies and their affiliates have developed "an increasing number" of ESG-related products, which has resulted in risks to rating agency compliance. The identified risk factors include inconsistent methodologies, inadequate disclosures, failures of internal controls and conflicts of interest.
Notwithstanding the criticisms of rating agencies with respect to ESG, the report indicates that, over time, the various rating agencies have been steadily improving in their compliance (see Chart 3 on page 20 of the most recent OCR report).
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