Ethics Ratings measure the actual compliance of financial holding companies (FHCs) with federal safety and soundness regulations and securities laws and its estimated impact on earnings, compensation, capital adequacy, counterparty credit risks and investment values.
Ethics Ratings replicate the CAMELS rating model and provide actionable intelligence on the actual financial condition of FHCs on a scale from well-managed and well-capitalized to FHCs that reach a troubled condition and, when there are enough FHCs in a troubled condition, cause systemic risk.
Ethics Ratings are provided for the market-leading FHCs. Currently these include 17 domestic FHCs and 3 foreign FHCs that have issued in aggregate approximately $3 trillion of public debt and equity. Ethics Ratings for additional FHCs are under development.
Ethics Ratings of 1 or 2 indicate sustainable FHC performance. FHCs rated 3, 4 or 5 are at risk of a negative earnings restatement based on their actual non-compliance with the federal safety and soundness standard of being well-managed.
Additional research analyzes the quality and scope of FHCs’ shareholder disclosures with respect to levels of compliance and compensation. This includes new proposed rules as outlined in Dodd-Frank Section 956.
Many FHCs do not disclose if they are in compliance as an FHC with the safety and soundness standards of being well-managed and well-capitalized as defined by the Gramm-Leach-Bliley Act. This lack of transparency hinders the ability of shareholders to assess the actual financial condition of an FHC and whether compensation by the FHC is aligned with the FHCs compliance with safety and soundness. This lack of disclosure may also represent material omissions and material weaknesses in ICFR if the FHC has breached and not disclosed violations of the safety and soundness standards.
FHC boards of directors must exercise a duty of care to detect and disclose material compliance and audit risks to shareholders. Ethics Metrics offers 10 questions that bring to light undisclosed material facts with a direct impact on investment values and compensation levels.