Jesse Eisinger posted a very good piece on the SEC and ratings agencies today (SEC keeps the Ratings Game Rigged). He writes about the Egan-Jones case, “This is your S.E.C., folks. It courageously assails tiny firms, and at the pace of a three-toed sloth. And when it goes after its prey, it’s because it has found a box unchecked, rather than any kind of deep, systemic rot.” Wonderful stuff. Read it.
And about the SEC investigation of Egan-Jones I can only ask: in light of all the problems brought to light by the financial crisis, how can the SEC devote time to this? Egan-Jones operates on a subscriber-based model — that is, they sell their ratings to people who subscribe to their services and not to the companies they rate like the majority of the NRSROs (Nationally Recognized Statistical Ratings Organizations) like Moody’s or S&P and others. Of the ten NRSROs sanctioned by the SEC, only three are subscriber-based. The rest are issuer-paid or paid by the companies they rate. See a conflict there?
It is not clear to me whether Egan-Jones broke rules but it is also not clear to me if this case is an appropriate allocation of resources. What is the public good to be achieved? What about the big problems in our system exposed by the financial crisis?
on a related note, I’ll resurrect my earlier piece on the SEC mutterings about regulating proxy advisory services, “Will The SEC Push Back?“.