SEC Considering “Cease-and-desist” Action Against Moody’s

Moody’s Investors Service (MCO) [MIS] disclosed in a 10-Q filing late on Friday that the U.S. Securities and Exchange Commission could start “cease-and-desist” proceedings against the credit ratings agency, which is responsible for publishing credit ratings on a wide range of debt obligations and entities that issue such obligations in markets worldwide.

According to Moody’s 10-Q filing, the ratings agency received on March 18, 2010, a “Wells Notice” from the Staff of the SEC stating that the agency “is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS in connection with MIS’s initial June 2007 application on SEC Form NRSRO to register as a nationally recognized statistical rating organization under the Credit Rating Agency Reform Act of 2006.”

Based on Moody’s filing, the SEC alleges that the company’s description of its procedures and principles were “false and misleading.” In the filing, Moody’s said it disagrees with the SEC, whose actions stem from the co.’s description of its rating procedures, and said that it has submitted a response to the Wells Notice explaining why its initial application was accurate and why it believes an enforcement action is unwarranted.

Moody’s also said in the filing that it is facing litigation from market participants related to how the securities it has rated have performed, adding that “the volume and cost of defending such litigation has significantly increased in the current economic environment.”

The threat of an SEC case is the latest setback for Moody’s. And if it’s cease-and-desist from being a ratings agency, this could mark the beginning of the end for the co. as a provider of credit ratings.

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