Commission Study on Credit Rating Agencies

SOX Section 702 is not an internal-control mandate for issuers; it directs the SEC to study credit rating agencies and barriers to entry. Your job as a Compliance Officer is to operationalize this as a governance and disclosure-readiness requirement: know where your organization relies on credit ratings, manage related third-party risk and conflicts, and be prepared to explain controls and decisioning tied to ratings. ¹

Key takeaways:

• SOX 702 is an SEC study directive, but it creates practical expectations around how issuers use and oversee credit ratings. ¹
• Build an inventory of “rating-dependent” decisions, owners, and controls, then document how you challenge, supplement, and monitor ratings. ¹
• Retain evidence that ratings are inputs, not unquestioned conclusions, especially in treasury, investments, counterparty exposure, and disclosure workflows. ¹

“Commission Study on Credit Rating Agencies” under SOX Section 702 is easy to misread as a direct compliance obligation for public companies. The statute’s operative requirement is on the SEC: the Commission “shall study” the role of credit rating agencies in the securities markets and barriers to entry. ¹ Still, this topic sits on a fault line for issuers because credit ratings show up in investment policies, counterparty eligibility, liquidity management, debt issuance strategy, covenant compliance, and risk disclosures.

A practical way to treat SOX 702 is as a governance readiness requirement. You want to be able to answer: Where do we use ratings? What do we do to validate them? How do we handle conflicts of interest and limitations in ratings? What do we do when ratings change or rating coverage is weak? Those are the questions that surface in audits, Board discussions, disclosure committees, and regulator interactions even though SOX 702 itself is a study directive. ¹

This page gives you requirement-level implementation guidance you can put into motion quickly: scoped applicability, step-by-step actions, evidence to retain, exam hangups, and an execution plan.

Regulatory text

Excerpt (SOX Section 702): “The Commission shall study the role of credit rating agencies in securities markets and barriers to entry.” ¹

Operator interpretation (what you must do):
Even though the statute directs the SEC to perform a study, compliance leaders at public companies should operationalize a defensible program around (1) where credit ratings are used as decision inputs, (2) how management challenges and supplements ratings, and (3) how rating reliance is governed, documented, and escalated. This is the practical posture that reduces disclosure and third-party risk tied to rating-driven decisions. ¹

Plain-English interpretation of the requirement

• The law required the SEC to examine how credit rating agencies influence securities markets and what prevents competition and accurate appraisals, including conflicts of interest and barriers to entry. ¹
• For issuers, the “requirement” is indirect: you should expect scrutiny of rating use cases, particularly where ratings substitute for internal analysis or drive investor-facing statements. Treat ratings as one input into a controlled decision process, not a control by themselves. ¹

Who it applies to

Entity types: Public companies (issuers). ¹

Operational contexts where this matters most:

• Treasury and cash/investment management: Money market and short-term investment eligibility criteria, concentration limits, and counterparty selection often reference rating thresholds.
• Debt and capital markets: Bond issuance planning, covenant triggers, and investor communications may depend on ratings or rating outlooks.
• Counterparty and credit risk: Banking partners, derivatives counterparties, insurers, and key customers may be assessed using ratings as a screening tool.
• Disclosure controls and procedures: Ratings-related statements in filings, earnings materials, and risk factors can become problematic if they are stale, oversimplified, or unsupported by internal governance.

Third parties in scope: Credit rating agencies (as third parties) plus any other third parties whose products embed ratings (data providers, broker-dealers, treasury platforms) if you consume ratings through them.

What you actually need to do (step-by-step)

1) Define your “ratings reliance” scope

Create a written scope statement that answers:

• Which parts of the business are allowed to use credit ratings as decision inputs?
• Which decisions are “rating-dependent” (cannot proceed without a rating) versus “rating-informed” (rating is optional)?
• Which rating sources are approved (agency name, data vendor, internal models)?

Practical tip: Start with policies. Search for “rating,” “investment grade,” “NRSRO,” “outlook,” and “watch” across Treasury, Investment Policy, Risk, Procurement, and Delegation of Authority documents.

2) Build a ratings use-case inventory (control map)

Make a simple register with:

• Use case (e.g., “short-term investment eligibility”)
• Business owner
• Systems and reports used
• Rating source(s)
• Decision rule (what threshold, what happens if rating changes)
• Manual vs automated control points
• Escalation path (who is notified; who can approve exceptions)
• Downstream disclosures impacted (if any)

This register becomes your single source of truth for audits and for change management when policies or agencies change.

3) Implement “challenge and supplement” controls

SOX 702’s study focus includes barriers to accurate appraisals and conflicts of interest. ¹ For issuers, the operational response is to prove you do not treat ratings as infallible.

Minimum control set to implement:

• Independent internal analysis requirement for material exposures: document at least one additional risk indicator beyond a rating (financial metrics, market indicators, internal counterparty assessment).
• Exception governance: define who can override rating-based rules and what documentation is required.
• Rating change monitoring: set up alerts and define required actions (hold, divest, collateral review, exposure reduction, disclosure review) when a rating changes.

Keep this control design principle: a rating can trigger a workflow, but it should not be the only evidence supporting a material decision.

4) Integrate ratings into third-party risk management

Treat the rating agency relationship like any other third party relationship where you rely on their outputs:

• Contract and sourcing: define permitted use, redistribution restrictions, and data accuracy disclaimers in a way the business understands.
• Operational resilience: have a fallback if the rating feed or data vendor is unavailable (manual retrieval procedure, alternate source, or temporary suspension of rating-dependent trades).
• Conflicts and independence: if any team has interactions with rating analysts (typical in capital markets activities), document permissible communications, approvals, and recordkeeping expectations.

5) Align to governance and disclosure workflows

Work with:

• Disclosure committee / legal: identify every place ratings appear in filings, offering materials, investor decks, and risk factor language. Track ownership and review cadence.
• Internal audit: confirm that “ratings reliance” controls are testable (clear control description, evidence, frequency, and owner).
• Board/committee reporting: if ratings or rating outlook changes are material to liquidity or capital access, define escalation expectations.

6) Operationalize in a system (so it doesn’t die in email)

Most teams fail here. Put the register, workflows, and evidence in a GRC system or structured repository with:

• assigned owners,
• review tasks,
• evidence upload,
• exception tracking,
• audit-ready exports.

If you already manage third-party risk and policy attestations in Daydream, add a “Credit Ratings Reliance” program area and connect it to your third-party inventory (rating agencies, data providers) plus control testing and disclosure review tasks. Keep it boring and repeatable.

Required evidence and artifacts to retain

Maintain artifacts that show governance, not just policy statements:

Core documentation

• Ratings reliance scope statement (approved by Compliance/Finance leadership)
• Ratings use-case inventory/register (current, version controlled)
• Relevant policies and standards (investment policy, counterparty policy, disclosure controls)

Operating evidence

• Rating monitoring evidence (alerts, watchlists, logs)
• Decision records showing ratings were challenged/supplemented (memos, credit notes, committee minutes)
• Exception approvals with rationale and compensating controls
• Third-party due diligence and contracts for rating data sources (where applicable)

Assurance evidence

• Internal audit test plans/results for rating-dependent controls (if audited)
• Management review sign-offs for disclosures containing ratings references

Common exam/audit questions and hangups

Expect questions phrased like these:

• “Where do you use credit ratings in decision-making, and who owns those decisions?”
• “What do you do when a counterparty is downgraded?”
• “Show evidence that you don’t rely on ratings alone for material exposure decisions.”
• “How do you ensure rating references in disclosures are current and reviewed?”
• “Do you have documented exception handling for rating-based thresholds?”

Hangups auditors commonly hit:

• Ratings appear in policies, but there is no monitoring evidence.
• Exception approvals exist, but no consistent rationale or compensating controls.
• Disclosures reference ratings, but ownership and review are unclear.

Frequent implementation mistakes (and how to avoid them)

1. Treating SOX 702 as “not applicable, ignore.”
   Avoidance: document a one-page applicability memo stating it is an SEC study directive and your organization’s risk-based operational posture for rating reliance. ¹

2. Building a policy without a register.
   Avoidance: the register is the control map. Without it, you cannot prove completeness or consistent operation.

3. Letting Treasury run this alone.
   Avoidance: pull in Legal/Disclosure, Risk, Procurement/TPRM, and Internal Audit early. Ratings touch all of them.

4. No downgrade playbook.
   Avoidance: define downgrade triggers, required actions, and escalation. Test it with a tabletop scenario.

5. Assuming data vendor controls equal rating agency controls.
   Avoidance: treat each third party in the delivery chain explicitly. Document dependencies and fallback paths.

Enforcement context and risk implications

No public enforcement cases were provided in the source catalog for this requirement. Practically, the risk is not “SOX 702 violation” exposure; the risk is that rating-driven decisions or statements become hard to defend under scrutiny, especially after a downgrade, liquidity event, or disclosure challenge. Anchor your program on repeatable governance and evidence.

Practical 30/60/90-day execution plan

Day 30: Establish scope and visibility

• Publish the ratings reliance scope statement and ownership model.
• Inventory where ratings appear (policies, procedures, disclosures, systems).
• Stand up the ratings use-case register with initial entries and owners.

Day 60: Control design and workflow integration

• Define challenge-and-supplement requirements for each rating-dependent use case.
• Implement downgrade monitoring and escalation rules.
• Add exception handling workflow and evidence requirements.
• Align disclosure review steps for any ratings references.

Day 90: Prove operation and audit readiness

• Run a downgrade tabletop and retain artifacts (agenda, outputs, action items).
• Perform a mini internal controls test on a sample of rating-driven decisions.
• Close gaps, update policies/register, and formalize ongoing review cadence in your GRC tool.

Frequently Asked Questions

Is SOX Section 702 a direct compliance requirement for public companies?

The statutory text directs the SEC to perform a study on credit rating agencies. ¹ For issuers, the practical obligation is to manage governance and disclosure risk around how your company relies on ratings.

What business process should “own” this requirement internally?

Usually Treasury owns most rating-dependent decisions, but Compliance or GRC should coordinate because disclosure controls, third-party oversight, and exception governance span multiple teams.

Do we need a formal due diligence package for credit rating agencies as third parties?

Build third-party due diligence proportional to reliance. If ratings drive material financial decisions, document sourcing, contractual terms, dependency risks, and how you monitor output quality and changes.

What’s the minimum evidence auditors will expect?

A complete use-case inventory, downgrade monitoring logs, and a sample of decision records showing ratings were supplemented with internal analysis. Keep exception approvals and disclosure reviews tied to ratings statements.

How do we handle situations where only one agency rates a counterparty or instrument?

Treat single-source ratings as higher risk. Document compensating controls such as internal credit assessment, tighter limits, or committee approval for exposure decisions.

How should we operationalize this in a GRC platform like Daydream?

Create a “Credit Ratings Reliance” program with a register of use cases, mapped owners, and recurring tasks for monitoring, exception approvals, and disclosure reviews. Link rating agencies and rating data providers in your third-party inventory so evidence stays connected to the decisions it supports.

Footnotes

1. Public Law 107-204