Did S&P Break SEC Regulations?

Tuesday, August 9, 2011

Did Standard and Poor’s Break SEC Regulations in Disclosing Its Downgrade to Select Parties?

The Administration and its allies have gone after Standard and Poor’s for its downgrade of the US bond rating to AA+. They have attacked S&P’s general competence, its failure to reexamine its decision in the light of a $2 trillion math error (a Wall Street Journal story does not reflect well on S&P’s haste) and the subjective and political basis for its judgment. Even if these attacks have merit, however, they come off as being less than convincing by virtue of sounding like sour grapes.

There is a much more straightforward basis for questioning S&P’s conduct, and it has nothing to do with how S&P arrived at its rating.
There is compelling evidence that the ratings agency made selective disclosure of its downgrade decision before it made it public last Friday evening. A reader told us certain hedge funds were informed Tuesday and traded successfully on the information. A separate source had told me certain banks were briefed on Thursday and were told of the US downgrade but assured their ratings would be unaffected. On Friday morning, Twitter was alight with the news.

Disclosing news of a ratings decision is required under SEC rules to be made publicly. All the discussion with favored parties is clear regulatory violation. Here is the germane section (boldface ours):

§ 240.17g-4 Prevention of misuse of material nonpublic information.

(a) The written policies and procedures a nationally recognized statistical rating organization establishes, maintains, and enforces to prevent the misuse of material, nonpublic information pursuant to section 15E(g)(1) of the Act (15 U.S.C. 78o–7(g)(1)) must include policies and procedures reasonably designed to prevent:


(1) The inappropriate dissemination within and outside the nationally recognized statistical rating organization of material nonpublic information obtained in connection with the performance of credit rating services;

snip

http://www.nakedcapitalism.com/2011/08/did-standard-and-poors-break-sec-regulations-in-disclosing-its-downgrade-to-select-parties.html

when did that start mattering for the powerful?

But.. maybe they pissed off the wrong people, in which case, maybe they get prosecuted...

Markets don't react the way they did without cause. I suspected this as soon as I heard about the downgrade.

The problem we have had is trying to find evidence that will stick when something like this happens. If they are found at fault - kick them to the mat and prosecute!!!
there is plenty of money made on insider trading that is just as a matter of course. these people will never be satisfied even if they owned all the money in the world - some probably dream of this happening for them. if we have the opportunity - let's get them!!!

:mad:

I'm sure he'll be able to reassure us all that there's Nothing to See Here.