In two actions released last week, the Securities and Exchange Commission (“SEC”) signaled its new focus on credit rating agencies and foretold the seriousness with which it will approach the expanded regulatory authority granted to the SEC by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). On August 31, 2010, the SEC released a Section 21(a) report on its investigation of Moody’s Investors Service, Inc. (“MIS”), the credit rating segment of Moody’s Corp. (the “21(a) Report”), and on September 2, 2010, instituted administrative proceedings against another credit rating agency, LACE Financial Corp. (“LACE”) and its founder. The 21(a) Report outlines MIS’s failure to downgrade the credit ratings of foreign debt offerings after MIS discovered that the original credit ratings had been assigned in error. While the SEC decided not to bring an enforcement action against MIS for stated jurisdictional reasons, the 21(a) Report indicates that credit rating agencies – or nationally recognized statistical rating organizations (“NRSROs”) – will receive greater enforcement attention by the SEC in the future. The enforcement action against LACE found that the company made misrepresentations in its application to become an NRSRO and violated SEC rules governing the conduct of NRSROs. Together with the increase in SEC regulatory authority over NRSROs and expanded liability of NRSROs contained in the Dodd-Frank Act, the SEC’s actions augur more SEC enforcement actions, and likely private lawsuits as well, against NRSROs.

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