The Securities and Exchange Commission's internal watchdog has criticized the agency for approving a credit rating agency, even though it had suspicions about the accuracy of its financial information.
There were serious questions as to whether the approval of the application of the undisclosed credit rating agency was in the public interest, said SEC Inspector General David Kotz in a report released on Friday.
Eleven credit agencies including the three that dominate the industry -- Moody's Corp
According to the report, SEC trading and markets staff had concerns about the adequacy of the unnamed credit agency's management, including the experience of its compliance officer.
SEC staff also identified concerns with the applications of other credit rating agencies but approved them anyway and said the issues would be addressed after the applications were approved, Kotz's report said.
These concerns included information on a firm's process for rating complex products like mortgage-backed securities and some of the procedures for handling material nonpublic information.
We believe that there is risk in the approach of resolving problems after the application's approval, Kotz said.
SEC staff however disagreed with parts of his report and said that to successfully deny an application, the SEC must make substantial factual and legal findings.
The issues identified did not provide a legally viable basis for denying the application, SEC trading and markets staff said in their written response.
Kotz's report made a number of recommendations to improve oversight of the credit rating agency industry, which has been criticized for giving top ratings to risky debt that later dropped in value.
The recommendations include requiring credit rating agency auditors to be overseen by the Public Company Accounting Oversight Board, which was established after the Enron and WorldCom accounting scandals and set up to police auditors of public companies.
Kotz also called for more disclosure about the process used to arrive at particular ratings.
Global regulators and policymakers have been pushing for more oversight of the industry after the worst financial crisis in decades exposed gaps in supervision.
(Reporting by Rachelle Younglai; Editing by Tim Dobbyn)