Egan-Jones Banned for 18 Months From Rating Sovereigns, ABS

Egan-Jones Ratings Co. was barred from grading government debt and asset-backed securities for 18 months after settling claims it made material misstatements to the U.S. Securities and Exchange Commission.

Egan-Jones misled the regulator by asserting it had been ranking the two asset classes since 1995 when registering for so-called Nationally Recognized Statistical Rating Organization status, the SEC said today in a statement. In fact, the closely held, Haverford, Pennsylvania-based company started rating the debt in 2008, the year it applied for the designation.

The “misrepresentation of the firm’s actual experience rating issuers of asset-backed and government securities is a serious violation that undercuts the integrity of the SEC’s NRSRO registration process,” Robert Khuzami, the SEC’s enforcement director, said in the statement.

The SEC decides which companies can issue NRSRO grades, which allow investors to meet regulatory requirements. The financial watchdog incorporated ratings in its rules in 1975, specifying that the only companies whose rankings could be used were Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Ten companies now carry the designation.

‘Agreeable Terms’

“Egan-Jones is very pleased to announce that the firm has settled its issues with the SEC on mutually agreeable terms,” Bill Hassiepen, co-head of the ratings desk, said in an e-mailed statement. “Egan Jones remains an NRSRO for all of its corporate, bank/finance, and insurance ratings and will re-apply for NRSRO designation in relatively short order.”

Egan-Jones, which was first accused of making the misrepresentations last April, must conduct a self-review and implement policies that correct issues identified in the order, according to the statement. In its July 2008 application, Egan-Jones said it had 150 outstanding ABS issuer ratings and 50 government grades.

Investors pay Egan-Jones for its opinions unlike S&P, Moody’s and Fitch, which charge issuers of debt securities for their grades. The company had 1,136 ratings outstanding and five employees at the end of last year, according to a November SEC report.

Egan-Jones, which has moved markets with its rating decisions, preceded Moody’s by an hour on June 13 in cutting Spain’s credit grade by two steps to CCC+ from B. Yields on the country’s 10-year obligations rose to a euro-era record the following day. The company reduced its rating on the U.S. by one step to AA+ from AAA on July 18, 2011.

President Sean Egan joined Bruce Jones, a former credit analyst at Moody’s, to form the company in 1995. Egan-Jones became an NRSRO in December 2007 after seven years of being denied the status, following passage of the Credit Agency Reform Act of 2006.

The legislation, which sought to increase competition among credit-rating firms, pushed the SEC to authorize companies to assign debt grades that banks use for determining capital withholding requirements.

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