Telegram is where we really talk. Don't miss out!
The SEC is taking proactive steps to address potential issues in credit rating practices, possibly influenced by recent critical media coverage and lessons learned from the Global Financial Crisis.
Bloomberg first reported that the Securities and Exchange Commission is examining Egan-Jones Ratings, a key player in the burgeoning private credit rating sector, which manages thousands of ratings in a market worth trillions.
Sources indicate that SEC enforcement attorneys are “looking into whether the firm and some of its senior executives have exerted improper commercial influence on its ratings procedures,” as they investigate. This inquiry is being conducted by officials from the agency’s complex financial instruments unit and has been ongoing since the Biden administration, continuing into this year. However, the SEC has not accused Egan-Jones or its executives of any wrongdoing, and the status of the investigation remains unclear.
An Egan-Jones representative stated that the firm prioritizes compliance and is in good standing with its regulator, emphasizing its commitment to serving clients and the broader capital markets.
Due to the ongoing US government shutdown, the SEC has refrained from commenting on the matter, explaining that its public affairs office is unable to respond to many press inquiries.
Egan-Jones is recognized as a Nationally Recognized Statistical Rating Organization, which enables its ratings to be utilized by US insurers for regulatory capital calculations. Higher ratings imply that insurers are required to reserve less capital against an asset.
Having established a significant presence in the rapidly evolving private credit market, Egan-Jones has thrived as larger ratings agencies shifted their focus to the public sector. According to Moody’s, approximately one-third of the $6 trillion in cash and invested assets held by US life insurers is allocated to various private credit investments.
Egan-Jones claims to be the most active rater in this market, having rated over 3,000 private credit investments last year with a team of about 20 analysts. This has raised concerns not only about potential rating shopping but also about the overall quality control of these ratings. As more insurers seek to invest in private credit, the significance of these ratings has come under scrutiny this year.
A recent report from the Bank for International Settlements noted that private credit ratings used by insurance companies are predominantly issued by smaller rating firms, which elevates the risk of “inflated assessments of creditworthiness.”
Additionally, Bank of England Governor Andrew Bailey mentioned discussions with industry representatives who expressed confidence in their sectors, except for concerns regarding rating agencies. On Tuesday, UBS Group AG Chairman Colm Kelleher indicated he is beginning to observe significant rating agency arbitrage within the insurance industry.
In June, Bloomberg reported that Egan-Jones faced criticism from major industry players due to its optimistic ratings of various private credit loans.
