In case “Comisión Nacional de Valores c. Standard & Poors Ratings LLC. Suc. Argentina s/ organismos externos” dated April 15, 2014, Argentina´s Supreme Court of Justice ratified the fine imposed by the National Securities Exchange Commission (“CNV”) to the rating agency Standard & Poor ‘s Ratings LLC. Suc. Argentina for having rated the negotiable debt securities issued by two financial institutions with a higher rate than the appropriate, according to the guidelines settled in its own procedure manual.

I. Background of the case

On July 15, 2002, in the context of Argentina´s economic crisis, Standard & Poor’s rated with the highest local note (raAAA) to  Citibank NA Sucursal Argentina global program of negotiable debt securities,  both senior and subordinated series, for an amount up to U$S 1,500,000 and BankBoston NA global program of negotiable debt  securities for an amount up to U$S 500,000,000.

CNV promoted administrative proceedings against the rating agency for having stepped aside from its own manual´s standards and having granted the securities with the highest rate, even though the external auditors had refrained from giving an opinion on the financial statements of the issuers, case in which, according to the manual, it should have been correct to rate the securities with the highest risk category instead of  the one actually granted.

Thus, by Resolution Nº 15.335 dated February 21, 2006, CNV imposed a penalty fine of $ 20,000 (Twenty Thousand Pesos) on the rating agency for failing to obey with the procedure manual registered in CNV.  The sentence determines that the rating agency directors and the members of the qualification counsel should respond in solidarity.

II. The decision of the Court of Appeals.

On October 8, 2010 the Resolution was ratified by Division D of the Court of Appeals in Commercial Matters.

Not only did the Court emphasized in the omission to comply with the rules contained in the procedure manual registered in the CNV, but also noted the directors and audit committee members liability, since, according to article 59 of the Companies Law (“Ley de Sociedades”), they should have supervised the rating  process, end which was not achieved in this case.

III. The judgment of the Supreme Court of Justice

Standard & Poor’s appealed the Court of Appeals decision.

The Supreme Court of Justice, based on the opinions of the Attorney General’s Office, confirmed the verdict as the behavior undertaken by the rating agency meant an infringement of the rules and therefore, it is worth a sanction.

In its decision, the Supreme Court not only analyzes the viability of the fine imposed, but also performs a thorough analysis on the scope of the CNV functions, the moral behaviors that people who participate in any kind of public offering must obey and establishes that CNV should look after public interest when regulating the trading activity.

Among the guidelines on which the decision is based we should point:

a) The CNV performs the police power  in the public offering of securities, so it must: i) establish the rules which every person directly or indirectly involved in the public offering- rating agencies included- should obey; ii) control the compliance to its provisions; iii) impose sanctions in case of non-observance of the rules.

b) The rating of securities placed through the public offering regime constitutes a large impact service,  that should be performed for the benefit of all investors. As this impact compromises the public interest, the rating agencies should bear a higher duty on the decisions they take.

c) For investors´ security purposes and stock market´s transparency, the risk rating should be based on clear guidelines established in current regulation and each rating agency´s manual registered in CNV.

d) Directors are jointly liable for having not observed the article 59 of Law No. 19550, which requires diligent work and imposes joint and unlimited liability for not having observed their duties.