UPDATE 2-U.S. SEC Sues Morningstar Over Commercial Mortgage Backed Securities Ratings


(Add company comment in third paragraph)

WASHINGTON, Feb.16 (Reuters) – The United States Securities and Exchange Commission (SEC) on Tuesday sued Morningstar CreditRatings LLC for allegedly violating U.S. securities laws in its ratings of commercial mortgage-backed securities, reported the regulator said in a statement.

Morningstar’s credit rating activity reportedly violated disclosure and internal oversight requirements in 30 mortgage-backed securities business transactions from 2015 to 2016, when the agency allowed analysts to make undisclosed adjustments to the constraints keys to its modeling, the SEC said.

A Morningstar spokesperson said the company complied with all regulatory requirements and the methodology complaint it voluntarily withdrew in 2018. The SEC also alleged no harm to investors, said she declared.

Rating agencies have come under fire after the US financial crisis, as inflated mortgage-backed securities ratings helped fuel a US real estate bubble. In the aftermath of the crisis, Congress tasked the SEC with overseeing rating agencies, but the agency has struggled to manage that oversight due to insufficient resources and technological changes, Reuters previously reported.

Morningstar has already paid $ 3.5 million to settle the SEC charges that violate conflict of interest rules designed to separate credit ratings and sales and marketing analysis.

U.S. laws require rating agencies to disclose their rating methods and stick to those frameworks, the SEC said on Tuesday. But according to SEC claims, Morningstar analysts have frequently made undisclosed adjustments to reduce stress on their models.

The changes benefited issuers who had paid for ratings, allowing them to pay less interest to investors, the SEC said.

The lawsuit was filed in the Southern District of New York against Morningstar Credit Ratings LLC. Morningstar Inc now manages credit ratings through its subsidiary DBRS Morningstar.

(Reporting by Chris Prentice; editing by Chris Reese and Richard Pullin)


Comments are closed.