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SEC Makes S&P Downgrade Inquiries

The Securities and Exchange Commission has asked credit rating agency Standard & Poor’s to disclose who within its ranks knew ofits decision to downgrade US debt before it was announced last week, as part of a preliminary look into potential insider trading, people familiar with the matter say.

The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.
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The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.

The inquiry was made by the SEC’s examination staff, which has oversight of credit rating firms, one person familiar with the matter said. The exam staff can make referrals to the SEC’s enforcement division if it believes any laws have been violated, but the inquiry might not result in a referral.

This person said they were looking at who had the information as a starting point. The person added that the agency is not aware of a leak from an S&P insider, nor was it aware of an aberrational trade.

Proving someone leaked information about the downgrade, or traded ahead of it, could be challenging. Many traders anticipated the downgrade and bets could occur across numerous securities or currencies without inside information. In a traditional insider trading case, there is often a more predictable correlation between a company’s stock price and a particular development.

The inquiry comes as the SEC has sought to be more pro-active in its oversight responsibilities. The agency launched specialized units within its enforcement division last year and has revised the approach of its examination group after hiring new leadership.

The exam group first gained the ability to inspect credit rating agencies in 2007. Those powers grew following the passage of the Dodd-Frank law last year. The exam group, led by Carlo di Florio, has been working more closely with the enforcement division in its review of registered firms since the SEC reorganized those divisions.

If the investigation results in a case, it would not be the first time government-related information leaked or a rating firm employee was charged with insider trading.

The SEC’s look comes as the Senate banking committee has said it is looking at S&P’s decision.

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