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No Charges for Moody’s in Ratings Violation

WASHINGTON — The Securities and Exchange Commission said Tuesday that it had declined to charge Moody’s Investors Service for violating securities laws by failing to comply with its own procedures for rating complex derivative securities in 2007.

The decision followed an S.E.C. investigation, and the commission used the opportunity to warn all of the national credit rating agencies that it would use new powers under the Dodd-Frank banking law to take action against similar conduct, even if it occurred outside the United States, as the Moody’s case did.

The S.E.C. said it had declined to pursue a fraud enforcement action in the case because of jurisdictional issues. The securities in question originated in and were rated and sold in Europe, the S.E.C. said.

The action by the commission comes two years after the beginning of a financial crisis caused in part by widespread losses on mortgage-related derivative securities that had been rated highly by national credit ratings agencies, including Moody’s.

Though the credit rating agencies have come under criticism over their role in the financial crisis, they have not been the subject of major enforcement actions by securities regulators.

Moody’s disclosed the inquiry in May, saying that the S.E.C. had warned that it might sue the firm for making “false and misleading” statements as part of its application as a nationally recognized statistical rating organization, known in S.E.C. parlance by the initials N.R.S.R.O.

The company’s share price dropped sharply after the investigation was reported. Moody’s shares spiked upward on Tuesday on news of the completion of the investigation, although the price finished relatively unchanged.

Michael Adler, a spokesman for the Moody’s Corporation, the parent of Moody’s Investors Service, said the company was pleased the matter had been resolved without an enforcement action.

“We fully support the commission’s message that every rating decision must be based only on credit considerations,” Mr. Adler said, “and we are committed to maintaining robust procedures to ensure that our internal company policies are followed.”

Robert Khuzami, the director of the S.E.C.’s enforcement division, said that because investors had relied on both the ratings and the statements that credit rating agencies made to the commission about how they determined credit ratings, the rating agencies must “have in place sufficient internal controls” over those procedures.

In detailing its findings, the commission said that Moody’s had failed to follow its procedures in 2007 when it determined that a coding error caused it to issue higher ratings than it otherwise would have on complex securities known as constant proportion debt obligations.

Despite the discovery, Moody’s failed to correct its ratings in part because of concerns that doing so would negatively affect the company’s business reputation, the report said. That decision was made by an internal committee that included two managing directors, two senior credit officers and a senior analyst.

In January 2008, about a year after the discovery of the coding error, Moody’s began to downgrade the securities, but still did not reveal the error publicly. In May 2008, an article in The Financial Times disclosed the error, and several weeks later Moody’s acknowledged its actions and fired three managing directors, including two members of the committee that had failed to act.

“Because of uncertainty regarding a jurisdictional nexus to the United States in this matter, the commission declined to pursue a fraud enforcement investigation,” the S.E.C. said in its report.

But it noted that the Dodd-Frank law contained a provision giving it jurisdiction over conduct within the United States “even if the securities transaction occurs outside the United States and involves only foreign investors.”

A version of this article appears in print on  , Section B, Page 3 of the New York edition with the headline: No Charges For Moody’s In Ratings Violation. Order Reprints | Today’s Paper | Subscribe

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