Reuters: Regulatory News: UPDATE 2-SEC to vote on charges against Egan-Jones-sources

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UPDATE 2-SEC to vote on charges against Egan-Jones-sources Apr 19th 2012, 19:09 Thu Apr 19, 2012 3:09pm EDT * SEC weighing whether Egan-Jones made misstatements * Action related to 2008 application with SEC * Involves record-keeping, past rating experience * Possible charges also involve conflicts policy issues * Egan-Jones lawyer says charges would be disappointing By Sarah N. Lynch and Karen Freifeld WASHINGTON, April 19 (Reuters) - U.S. securities regulators are planning to vote on Thursday on whether or not to file civil charges against credit-rating firm Egan-Jones, a move the firm fears could gravely threaten its business, documents and people familiar with the matter said. The possible charges by the U.S. Securities and Exchange Commission are related to alleged misstatements the firm made in its 2008 regulatory application to rate two classes of securities - asset-backed securities and sovereign debt, according to the documents and these people. The possible charges, which would require a majority commission vote, are linked to issues such as misrepresenting the firm's rating experience, conflict-of-interest policy issues, and a failure to keep certain books and records, the people said. One person familiar with the matter says the SEC may be considering suspending Egan-Jones from rating sovereign and asset-backed securities for two years. A "Wells notice", or a document the SEC issues to possible defendants when it plans to recommend charges, was sent to Egan-Jones in October, this person said. Egan-Jones is one of the few ratings agencies whose services are paid for by subscribers, rather than the issuers of the securities it rates. In its defense to the agency, Egan-Jones warned the SEC that enforcement action could "effectively put out of business the leading independent, non-conflicted David to the issuer-paid Goliath," according to documents reviewed by Reuters. Egan-Jones is the smallest U.S.-recognized credit rating firm and it has the fewest analysts on staff compared with its competitors, according to a 2011 SEC report. That report said Egan-Jones only has five analysts and analyst supervisors on staff, compared with ratings giant Standard & Poor's, which had 1,345 analysts on staff. The firm has argued that it brings necessary competition to the ratings agency marketplace, and its president, Sean Egan, has been a frequent critic of other ratings firms. Egan-Jones also suggested in documents sent to the SEC that the issues raised by the regulator were minor in comparison to the benefit the ratings provide to the market. "We are left with the troubling suggestion that providing the most timely, accurate and un-conflicted ratings to a market in dire need of this information is subordinate to the commission's aspirational bookkeeping and forms standards," the documents said. Alan Futerfas, counsel to Egan-Jones, told Reuters he would be "greatly disappointed" if the agency takes action, but that he is unaware if the SEC is voting on the matter Thursday. An SEC spokesman declined to comment. Sean Egan did not immediately return a call for comment. CONFLICTS Egan-Jones, which is based in Haverford, Pennsylvania, has been faster than the big-three ratings agencies in downgrading some developed countries and certain companies in the wake of the global financial crisis. Its actions usually have little market impact, but in November it made headlines when it downgraded Jefferies Group over concerns about euro-zone debt exposure, contributing to a sell-off in the shares of the midsize investment bank. The subscriber-paid model, Sean Egan has said, eliminates a key source of conflict that policymakers have since flagged as a root of the U.S. housing crisis of 2008, when subprime-related securities received top ratings from the nation's three leading credit-rating firms: Moody's, McGraw-Hill Cos Inc's Standard & Poor's, and Fimalac SA's Fitch. Other industry players have argued, however, that the subscriber-paid model also comes with conflicts of interest. The SEC first got authority from Congress to regulate credit-rating firms in 2006. Under that regime, firms file applications with the SEC to be dubbed as "nationally recognized" rating agencies. SEC regulations require credit-rating firms to maintain certain books and records, furnish financial reports, disclose and manage conflicts of interest and establish procedures to manage the handling of material, non-public information, among other things. A report by the SEC's inspector general in 2009 cited problems with a credit-rating firm funded by subscriber fees, but did not name Egan-Jones by name. People familiar with the matter, however, confirmed it was referring to Egan-Jones. The watchdog's report cited suspicions regarding the accuracy of financial information provided in the subscriber-model firm's application. The report criticized the SEC for approving the application and delaying in starting an inspection of the firm. Link this Share this Digg this Email Reprints

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