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SEC queries S&P downgrade methodology

THE Securities and Exchange Commission (SEC) is reviewing the method Standard & Poor's used to cut the US's credit rating and if the firm properly protected the confidential decision, a person with direct knowledge of the matter has said.

THE Securities and Exchange Commission (SEC) is reviewing the method Standard & Poor's used to cut the US's credit rating and if the firm properly protected the confidential decision, a person with direct knowledge of the matter has said.

SEC inspectors are examining S&P's policies for conducting such analyses and whether those procedures were followed when the ratings agency firm downgraded the US's credit rating this month, said the person, who declined to be identified.

The downgrade of the US for the first time triggered an equity rout that wiped about $US6.8 trillion ($6.56 trillion) off the value of global stocks. US officials have said the downgrade was based on a flawed analysis that overstated US debt by about $US2 trillion S&P said the discrepancy did not change projections that the US debt-to-gross domestic product ratio will probably continue to rise in the next decade.

S&P lowered the US's AAA grade to AA after warning on July 14 that it would reduce the ranking in the absence of a credible plan to decrease deficits, even if the country's $US14.3 trillion debt limit was raised.

The decision was at odds with the other two main ratings firms, Moody's Investors Service and Fitch, both of which said the US continued to deserve the top credit rating.

SEC staff are also looking into whether certain market participants learned of the downgrade before its announcement. The inquiry, which is in the preliminary stages, may not result in a referral to the SEC's enforcement division, the source said.

An S&P spokesman said the firm does not discuss specific interactions it has with regulators.

The rating downgrade added to concern about prospects for the global economy as Europe's debt crisis deepened. US stocks fell for a third straight week, with the S&P500 losing 1.7 per cent to 1178.81 in the five days to Friday, capping a week of record swings.

The downgrade followed an agreement by US lawmakers on August 2 to raise the debt ceiling and put in place a plan to enforce $US2.4 trillion in spending cuts in the next 10 years, less than the $US4 trillion that S&P had said it preferred. The political wrangling that preceded the debt pact was also a concern, S&P said. The SEC inquiry was reported in the weekend's Financial Times.


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