The Securities and Exchange Commission delivered a blistering report Tuesday that detailed the shortcomings of Fitch Ratings, Moody's Investors Service and Standard & Poor's when it came to rating RMBS and CDOs.

"In the course of our examination, serious shortcomings were found at these firms," said Securities and Exchange Commission Chairman Christopher Cox.

The SEC conducted an examination aimed at exploring how the three major rating agencies actually went about rating RMBS, specifically subprime collateral, and CDOs. These securities are at the heart of the credit crunch related to the collapse of the housing market.

The 10-month review, executed by 40 SEC staff members, combed through hundreds of thousands of pages of information from the rating agencies and their internal emails.

The SEC's found that significant aspects of the ratings process were not always disclosed, a problem at all three rating agencies. For example, out-of-model adjustments were made to ratings models, but the rationale for these deviations were not documented.

"It was impossible for us as examiners to understand the rational, to determine what happened," said Lori Richards, director of the office of compliance examinations and inspections, with regards to out-of-model adjustments.

Conflicts of interest with regards to issuers were also found at all three firms.

"While analysts were prohibited from fee discussions with issuers, their managers were allowed to, at some firms," Richards said. At one credit rating firm, the SEC found emails that included members of marketing teams who expressed concerns that changes to a ratings model would impact the firm's market share.

However, there is no evidence that firms' models were actually adjusted in order to secure a deal.

That said, the SEC declined to specifically name which firms were guilty of specific instances. Also, individual examination findings are non-public, Richards added, unless the commission determined to take an enforcement action.

As a result of the examination, the SEC will release proposed reforms aimed at combating the shortcomings found at the rating agencies for RMBS and CDOs, said Cox.

"Each agency has agreed to take measures to address issues we have identified, to ensure that investors have confidence in a system of ratings," he said.

These recommendations include using different symbols for structured finance ratings from the ones used for traditional bonds, or at the very least issuing reports that disclose those differences. Also, the SEC wants the firms to clarify the limits and purposes of ratings.

The ultimate goal is for structured finance ratings to be consistent with the objective of having investors make independent assessments of the collateral in question, said Cox, and to eliminate any conflicts of interest.

Roughly 80% of RMBS deals were arranged by 12 investment banking firms and 90% of CDO deals were arranged by 11 i-banks, the SEC found.

In the coming months, the other seven credit rating agencies registered with the SEC will also be examined.

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