Recent SEC Case Highlights Concern for Conflicts in Obtaining Ratings
Published: 12 July 2022
On June 21, the Securities and Exchange Commission (SEC) charged Egan-Jones Ratings Company, a nationally recognized statistical rating organization registered with the SEC, with violating conflict of interest rules for registered rating agencies. Among the SEC’s findings, Egan-Jones’ involvement in its client’s business activities was found to have influenced it in while determining a credit rating for that client. In another circumstance, Egan-Jones continued to issue and maintain ratings for a client that had contributed 10% or more of its net revenues during the prior fiscal year. Egan-Jones agreed to settle the matter by paying a $1.7 million penalty and more than $146,000 in disgorgement and interest.
For fund managers who use rating agencies for their funds or firms, this case highlights additional issues to consider when engaging a rating agency. Although use of rating agencies is not currently widespread among US fund managers, this could change in the transition to the SEC’s new Marketing Rule, which opens up the ability to use endorsements such as third-party ratings in marketing material.
This case does not imply any wrongdoing by Egan-Jones’ respective clients. However, under the new Marketing Rule, a description of any material conflicts of interest on the part of the person giving the testimonial or endorsement is required when it is used in an advertisement. This requirement elevates the importance of understanding any potential conflicts of interest in third-party ratings. A recent AIMA webinar focused on the use of testimonials and endorsements under the new Marketing Rule, a replay of which is available for members here.Should you have any questions on this matter, please contact Suzan Rose ([email protected]).