The Securities and Exchange Commission (SEC) staff released a report Thursday showing some nationally-recognized rating agencies failed to disclose or manage conflicts of interest and changed rating methodologies for securities without disclosing the changes until months later.

The findings were among several areas of concern that arose from examinations of nationally recognized statistical rating organizations (NRSROs) conducted annually by the staff of the SEC’s Office of Credit Ratings and Examination. NRSROs register with the SEC and submit to commission regulations and examinations.

In its report, the staff said the NRSROs appropriately addressed staff concerns and recommendations made in the report from the first set of examinations.

This latest report said Standard and Poor’s and Moody’s Investors Service were the two largest NRSROs, with almost 1.2 million and 93,913 ratings, respectively, as of Dec. 31, 2011. They accounted for 83% of all credit ratings, according to the report. Combined with Fitch Ratings, the three accounted for more than 96% of all outstanding credit ratings, it said.

All nine NRSROs rated almost 2 million of government securities, the primary category among five listed by the SEC staff. The only NRSROs that did not rate government securities were A. M. Best Co. and Morningstar Credit Ratings. Altogether, the agencies were responsible for 2.61 million total ratings as of the end of 2011.

The report showed S&P has 1,172 credit analysts and supervisors, Moody’s 1,124, Fitch 758, and Kroll Bond Rating Agency 22.

The report found that each of the larger NRSROs and two of the smaller ones did not appear to follow their methodologies and certain policies and procedures in determining certain credit ratings. It said one NRSRO failed to conduct the analyses and request the documents required under its policies and procedures when it issued a short-term investment grade rating for an issuer that two weeks later, petitioned for bankruptcy.

Other findings were that, in some cases, securities were not downgraded in a timely fashion according to policies and procedures, methodologies were published and disclosed inconsistently and without enough transparency, and directors were not actively exercising their required oversight duties.

The SEC staff also said that two of the larger NRSROs and three of the smaller ones have not fully disclosed or managed conflicts of interest and that all NRSROs had weaknesses in record retention and recordation of rating actions and committee procedures.

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