SEC Reviews S&P Math, Possible Leak of Rating

The Securities and Exchange Commission is reviewing the method Standard & Poor’s used to cut the U.S.’s credit rating and whether the firm properly protected the confidential decision, according to a person with direct knowledge of the matter.

SEC inspectors are examining S&P’s policies for conducting such analyses and whether those procedures were followed when the New York-based firm downgraded the U.S.’s credit rating Aug. 5, said the person, who declined to be identified because the inquiry isn’t public.

U.S. officials have said the downgrade was based on a flawed analysis which overstated U.S. debt by about $2 trillion.

S&P lowered the nation’s AAA grade to AA+ after warning on July 14 that it would reduce the ranking in the absence of a credible plan to lower deficits even if the nation’s $14.3 trillion debt limit were lifted.

In addition to the analysis, SEC staff are also looking into whether certain market participants learned of the downgrade before its announcement. The inquiry, which is in preliminary stages, may not result in a referral to the SEC’s enforcement division, the person said.

Ed Sweeney, an S&P spokesman, said the firm doesn’t discuss specific interactions it has with regulators.

“S&P takes its confidential information and securities trading policies, and the related securities regulation, very seriously,” Sweeney said in a statement. “Our policies prohibit analysts or rating committee members from trading and holding securities or options of the companies or governments they rate.”

Sweeney said the firm has “long-standing policies and procedures in place” to protect confidential information. Sweeney also said the firm had previously indicated in a July statement that there was a chance of a downgrade.

S&P “published several reports and broadly communicated our views regarding the potential impact on other fixed-income securities,” the statement said.

The inquiry was reported earlier today by the Financial Times.

To contact the reporter on this story: Joshua Gallu in Washington at jgallu@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

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