SEC Expands Texting Crackdown to Big Ratings Agencies

The Securities and Exchange Commission’s crackdown on texting and the use of unauthorized messaging apps continued Tuesday with 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.

The violations included employees, including those at senior levels, communicating for purposes relating to credit rating activities via text messages and other messaging platforms, such as WhatsApp, that were not monitored.

The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, and agreed to pay combined civil penalties of more than $49 million as follows:

• Moody’s Investors Service Inc. 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.

The firms have begun implementing improvements to their compliance policies and procedures to address these violations, the SEC said. Each of the credit rating agencies, with the exception of A.M. Best and Demotech, is also required to retain a compliance consultant.

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 SEC’s investigations,” and, as a result, will not be required to retain a compliance consultant, according to the SEC.

“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 Division of Enforcement in a statement.

With the 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.

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,” the SEC said.

The SEC has levied more than $3 billion in fines to date in its off-channel communications sweep. On Aug. 14, the agency announced $393 million in fines against 26 firms including Edward Jones, LPL Financial and Raymond James.