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U.S. SEC sues Morningstar over ratings of commercial mortgage-backed securities
Source: Reuters
U.S. LEGAL NEWS
FEBRUARY 16, 2021 4:39 PM UPDATED 16 MINUTES AGO
U.S. SEC sues Morningstar over ratings of commercial mortgage-backed securities
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission (SEC) on Tuesday sued Morningstar Credit Ratings LLC for allegedly violating U.S. securities laws in its ratings of commercial mortgage-backed securities, the regulator said in a statement.
Morningstar’s credit ratings business allegedly violated disclosure and internal controls requirements in 30 commercial mortgage-backed securities transactions from 2015 to 2016 when the agency allowed analysts to make undisclosed adjustments to key stresses in its modeling, the SEC said.
A spokesperson for Morningstar Inc did not respond immediately to request for comment.
Ratings agencies came under criticism after the U.S. financial crisis as inflated ratings of mortgage-backed securities helped fuel a U.S. housing bubble. In the wake of the crisis Congress charged the SEC with overseeing the ratings agencies, but the agency struggled with the oversight due to insufficient resources and technology changes, Reuters previously reported.
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FEBRUARY 16, 2021 4:39 PM UPDATED 16 MINUTES AGO
U.S. SEC sues Morningstar over ratings of commercial mortgage-backed securities
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission (SEC) on Tuesday sued Morningstar Credit Ratings LLC for allegedly violating U.S. securities laws in its ratings of commercial mortgage-backed securities, the regulator said in a statement.
Morningstar’s credit ratings business allegedly violated disclosure and internal controls requirements in 30 commercial mortgage-backed securities transactions from 2015 to 2016 when the agency allowed analysts to make undisclosed adjustments to key stresses in its modeling, the SEC said.
A spokesperson for Morningstar Inc did not respond immediately to request for comment.
Ratings agencies came under criticism after the U.S. financial crisis as inflated ratings of mortgage-backed securities helped fuel a U.S. housing bubble. In the wake of the crisis Congress charged the SEC with overseeing the ratings agencies, but the agency struggled with the oversight due to insufficient resources and technology changes, Reuters previously reported.
-snip-
Read more: https://www.reuters.com/article/us-usa-sec-morningstar/u-s-sec-sues-morningstar-over-ratings-of-commercial-mortgage-backed-securities-idUSKBN2AG2N8
Source: Securities and Exchange Commission
SEC Charges Ratings Agency With Disclosure And Internal Controls Failures Relating To Undisclosed Model Adjustments
FOR IMMEDIATE RELEASE
2021-29
Washington D.C., Feb. 16, 2021 — The Securities and Exchange Commission today filed a civil action alleging that former credit ratings agency Morningstar Credit Ratings LLC violated disclosure and internal controls provisions of the federal securities laws in rating commercial mortgage-backed securities (CMBS).
Credit ratings are used by market participants to help evaluate credit risk, price certain securities, and guide the investment decisions of individuals and institutional investors alike. To promote transparency in the process, the federal securities laws require credit rating agencies to publicly and accurately describe the procedures and methodologies used to determine credit ratings, and to implement effective internal controls to ensure that they follow those procedures and methodologies.
According to the complaint, in 30 CMBS transactions totaling $30 billion that Morningstar rated from 2015 to 2016, the credit rating agency permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction. The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions.
According to the complaint, analysts frequently made these undisclosed adjustments to reduce the stress applied in the model and, by easing the stresses, Morningstar lowered the credit enhancement it required for many of the ratings it awarded classes of the CMBS transactions. This, the complaint alleges, in certain instances benefited the issuers that paid for the ratings because it enabled those issuers to pay investors less interest than they would have without the adjustments.
“To increase transparency and guard against conflicts of interest, the federal securities laws require credit rating agencies to disclose how ratings are determined and to have effective internal controls to ensure they adhere to their ratings methodologies,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “In this action, the complaint alleges that Morningstar failed on both counts by permitting analysts to make undisclosed adjustments over which Morningstar had no effective internal controls.”
The SEC’s complaint, filed today in federal district court in the Southern District of New York, charges Morningstar with violating disclosure and internal control provisions of the Securities Exchange Act of 1934 applicable to credit rating agencies, and seeks injunctive relief, disgorgement with prejudgment interest, and civil penalties.
The investigation was conducted by Robert Leidenheimer and Brent Mitchell of the Complex Financial Instruments Unit and supervised by Deputy Chief Reid Muoio, with assistance from Thomas Bednar and James Connor of the Enforcement Division’s Trial Unit. Mr. Bednar and Mr. Connor will lead the litigation.
FOR IMMEDIATE RELEASE
2021-29
Washington D.C., Feb. 16, 2021 — The Securities and Exchange Commission today filed a civil action alleging that former credit ratings agency Morningstar Credit Ratings LLC violated disclosure and internal controls provisions of the federal securities laws in rating commercial mortgage-backed securities (CMBS).
Credit ratings are used by market participants to help evaluate credit risk, price certain securities, and guide the investment decisions of individuals and institutional investors alike. To promote transparency in the process, the federal securities laws require credit rating agencies to publicly and accurately describe the procedures and methodologies used to determine credit ratings, and to implement effective internal controls to ensure that they follow those procedures and methodologies.
According to the complaint, in 30 CMBS transactions totaling $30 billion that Morningstar rated from 2015 to 2016, the credit rating agency permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction. The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions.
According to the complaint, analysts frequently made these undisclosed adjustments to reduce the stress applied in the model and, by easing the stresses, Morningstar lowered the credit enhancement it required for many of the ratings it awarded classes of the CMBS transactions. This, the complaint alleges, in certain instances benefited the issuers that paid for the ratings because it enabled those issuers to pay investors less interest than they would have without the adjustments.
“To increase transparency and guard against conflicts of interest, the federal securities laws require credit rating agencies to disclose how ratings are determined and to have effective internal controls to ensure they adhere to their ratings methodologies,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “In this action, the complaint alleges that Morningstar failed on both counts by permitting analysts to make undisclosed adjustments over which Morningstar had no effective internal controls.”
The SEC’s complaint, filed today in federal district court in the Southern District of New York, charges Morningstar with violating disclosure and internal control provisions of the Securities Exchange Act of 1934 applicable to credit rating agencies, and seeks injunctive relief, disgorgement with prejudgment interest, and civil penalties.
The investigation was conducted by Robert Leidenheimer and Brent Mitchell of the Complex Financial Instruments Unit and supervised by Deputy Chief Reid Muoio, with assistance from Thomas Bednar and James Connor of the Enforcement Division’s Trial Unit. Mr. Bednar and Mr. Connor will lead the litigation.
https://www.sec.gov/news/press-release/2021-29
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