Credit rating agency S&P Global Ratings agreed to pay $2.5 million and improve its compliance practices to settle allegations by the Securities and Exchange Commission (SEC) that its marketing team pressured the ratings team concerning the rating of a particular mortgage-backed security transaction.
Ratings agencies are prohibited from issuing a rating if a sales and marketing employee tries to influence the determination, noted Osman Nawaz, chief of SEC’s Complex Financial Instruments Unit, in a press release Monday.
For this reason, S&P Global required internal communications between the analytics department and marketing department to be “chaperoned,” or sent through its compliance department for review and redaction, to make sure they didn’t violate conflict of interest rules. This check appeared to fail regarding the residential mortgage-backed security transaction, according to the SEC’s order.
Over five days in August 2017, employees in the commercial division of S&P Global sent urgent, pressuring emails to analytics employees about the rating of the transaction, which the marketing team described as a “big win” for the company, the SEC said. The commercial department sent their emails through the compliance department as required, but the compliance team allowed at least some of the emails, which included marketing considerations, to pass through to the ratings team, the SEC alleged.
S&P violated the Securities Exchange Act by issuing the ratings and maintaining them, despite the possibility they were influenced by the marketing team, the SEC alleged.
The ratings company “failed to establish, maintain, and enforce written policies and procedures designed to ensure compliance with those rules,” according to the agency.
S&P discovered the alleged failings and self-reported to the SEC. The company cooperated with the agency and “took remedial steps to enhance its conflicts of interest policies and procedures,” the SEC said.
In addition to the penalty, S&P agreed to review and enhance its policies and procedures concerning conflict of interest, to withdraw the ratings at issue in the order, and be censured.
S&P must provide written evidence, in the form of a narrative with exhibits, to the SEC showing it has complied with the order.
“Credit rating agencies play a systemically important role in the structured products markets, and the federal securities laws require them to insulate their analytical functions from the influence of business considerations,” said Nawaz.
“[S&P Global Ratings] is pleased to have concluded this matter,” the company said in a press release. “[S&P Global Ratings] takes compliance with regulatory obligations very seriously and is committed to the integrity of its ratings process and high-quality independent credit ratings.”