Six major credit rating agencies have been fined by the U.S. Securities and Exchange Commission (“SEC”) for their failure to keep electronic communications. The rating agencies have agreed to pay $49 million in civil penalties to the SEC to settle claims that they broke record-keeping rules.
The rating agencies are Moody’s Investors Service, the rating arm of Moody's Corporation MCO; S&P Global Ratings, a subsidiary of S&P Global Inc. SPGI; Fitch Ratings; HR Ratings de Mexico; A.M. Best Rating Services; and Demotech.
All the firms mentioned above have admitted to the facts stated in the SEC’s order, which claimed that these rating agencies violated record-keeping provisions of federal securities laws.
The maximum fine of $20 million will be paid each by Moody’s and S&P Global. Fitch Ratings will pay $8 million, whereas A.M. Best agreed to pay $1 million. HR Ratings de Mexico agreed to pay $250,000 and Demotech will pay $100,000.
Some Details About the SEC’s Order
Per the SEC’s order, employees of Moody’s were likely communicating about credit rating activities via text messages and WhatsApp on personal devices, which included an associate managing director making off-channel comments about credit rating clients.
Sanjay Wadhwa, the deputy director of the SEC’s Division of Enforcement, said, “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.”
Thus, Moody’s, S&P Global, Fitch Ratings and HR Ratings de Mexico agreed to conduct a comprehensive review of policies regarding the retention of electronic communications.
A Moody's spokesperson said, “Moody's is fully committed to upholding our regulatory record-keeping obligations, and we are pleased to put this matter behind us.”
HR Ratings said that over the past year, it “has significantly strengthened its electronic recordkeeping policies and procedures. The settlement with the SEC underscores our firm commitment to upholding regulatory standards in every jurisdiction where we operate.”
A spokesperson for A.M. Best said, “AM Best places great importance on our regulatory responsibilities and remains committed to the integrity of our ratings process and high-quality independent credit ratings.”
The SEC’s Actions on Record-Keeping Failures
In the past, the SEC has fined various firms for their failure to maintain proper records, particularly in connection with employees’ use of text messages and messaging apps.
Because of the increasing use of off-channel communications to discuss company business, it has become more difficult for broker-dealers and investment advisers to meet the record-keeping requirements.
Even though official communication channels generate automatically archived records, employees have increasingly resorted to unofficial platforms to evade scrutiny. While this practice helps conceal conversations, it jeopardizes regulatory compliance and the integrity of financial transactions.
Thus, the SEC regularly conducts investigations to ensure that Wall Street banks have been adequately logging employees' text messages and emails.
Regulators require banks to keep records of their staff communications, and typically ban the use of personal email, texts and messaging apps for work purposes.
Last month, Piper Sandler Companies PIPR agreed to pay a total civil penalty of $16 million to the SEC and the Commodity Futures Trading Commission for record-keeping failures. PIPR paid $14 million to the SEC and $2 million to the Commodity Futures Trading Commission.
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