The Securities and Exchange Commission on Thursday issued its second annual staff report on examinations of credit rating agencies registered as Nationally Recognized Statistical Rating Organizations (NRSROs).

While reporting that most NRSROs “appropriately addressed” recommendations in the first annual report, in 2011, the Commission did detail some new, questionable practices. It also announced a new initiative to highlight compliance issues at credit rating agencies between examinations.

Congress mandated the creation of the Office of Credit Ratings as part of the Dodd-Frank Act, which imposed new reporting, disclosure, and examination requirements for NRSROs. And requires the Commission staff to examine each one on at least an an annual basis. In reports that follow those examinations, firms are referred to as "large NRSROs" or "small NRSROs" to “promote the public's understanding without compromising due process requirements.”

Among the matters covered in the 2012 report are findings and recommendations in eight areas, including whether the NRSRO conducts business in accordance with its policies, procedures, and methodologies, how it manages conflicts of interest, and whether it maintains effective internal controls.

Issues identified at one or more NRSROs (which were not named) include the following:

The methodology applied to rating certain securities appears to have been changed, but the change was not publicly disclosed for several months

Certain securities were not timely downgraded in accordance with policies and procedures related to rating watch status

Methodologies were published and disclosed inconsistently and in a less-than-transparent manner

Directors were not actively exercising their required oversight duties

One of the larger NRSROs was found to have changed the method for calculating a key financial ratio in rating certain asset-backed securities, but failed for several months to publicly disclose the change and its effects on the ratings, and continued to incorrectly reference the previously used method in its published rating reports. It also failed to consistently apply its rating methodology.

Commission staff also identified an instance where a smaller NRSRO allowed an issuer to improperly influence the substance of its ratings press release. After receiving a request from the issuer to re-characterize its opinion of the issuer's financial performance in its press release, the NRSRO did alter the language. Approximately two weeks after the NRSRO published these ratings and the press release, the issuer petitioned for bankruptcy.

The Office of Credit Ratings also announced it will promote compliance between exams by sending letters to the Designated Compliance Officers at all of the firms as issues arise. The first industry-wide "Dear DCO" letter, sent on Thursday, urges NRSROs to “review SEC rules on preventing the misuse of material nonpublic information and avoiding unfair, coercive, or abusive practices with respect to credit ratings.”