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January 22, 2013 7:28 pm
The head of Egan-Jones Ratings agency, a small rival of the big three credit rating agencies, has been banned from issuing official ratings on asset-backed and government securities for 18 months as part of a settlement with US regulators.
In April, Sean Egan, an outspoken critic of competitors who are paid by the companies whose securities they rate, and his firm became the first to be charged by the Securities and Exchange Commission since it was given oversight of credit rating agencies.
The SEC alleged that Mr Egan misled regulators when his company applied in 2008 to be recognised as a rating agency for asset-backed and government debt by overstating his experience in the field.
He and the company have agreed to pay a $30,000 penalty to settle the matter, without admitting or denying wrongdoing.
Egan-Jones’ application stated the company had 150 credit ratings for asset-backed securities and 50 ratings for sovereign securities, and had been rating both classes of securities since 1995. The SEC alleged those statements were false and at the time of the application in July 2008, the company had not issued any ratings for asset-backed or government debt.
The SEC also alleged that Egan-Jones violated rules prohibiting conflicts of interest by allowing two analysts to rate securities they owned. In 2009, the SEC alleged, one analyst helped rate “at least 17 different issuers while owning the securities of those issuers”.
The ban is not expected to affect Egan-Jones’ business, which is more heavily focused on rating corporate debt. The firm can still issue ratings on the securities covered by the settlement but they will not be recognised by the SEC, which means some investors cannot rely on the ratings when purchasing securities.
In a statement, Egan-Jones, whose ratings are financed by investors, said it was “very pleased” to settle the case. The company said it would continue to rate corporate, banks and insurance and would reapply for authorisation to rate asset-backed and government debt.
The SEC launched its enforcement investigation into Egan-Jones in early 2010 following an examination of the ratings company.
Mr Egan and his lawyers initially alleged that regulators had unfairly singled him and his company out. The big three credit rating agencies – Moody’s; Standard & Poor’s, a unit of McGraw-Hill; and Fitch – have not been charged with any wrongdoing following the financial crisis.
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