Morningstar Credit Ratings (MCR) agreed to pay a civil penalty of $1.15 million to resolve charges of disclosure violations and internal control failures levied by the Securities and Exchange Commission (SEC) last year.
The final judgment entered by the U.S. District Court for the Southern District of New York on Tuesday resolves the case opened in February 2021, when the SEC alleged MCR failed to disclose the commercial mortgage-backed securities (CMBS) rating methodology it used to rate $30 billion from 30 transactions from 2015-16 “permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction.”
“By using the undisclosed adjustments, Morningstar often lowered the credit enhancement for many classes of certificates of the CMBS transactions that it rated,” the SEC’s complaint stated. “This allowed Morningstar to assign higher credit ratings to those classes to the benefit of the issuers that hired and paid Morningstar.”
The SEC further alleged MCR’s internal control structure “omitted elements designed to assess whether its analysts appropriately implemented the ‘loan-specific’ stress adjustments.” This omission was material, the agency contended.
MCR neither admitted nor denied the SEC’s findings in consenting to entry of the final judgment.
MCR no longer operates as a credit rating agency. At the time the SEC announced its complaint, a company spokesperson said the agency “overstepped its regulatory limitations by imposing requirements that would regulate the substance of credit-rating methodologies” and that MCR was reviewing the allegations.