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Morningstar will pay $1.15 million to settle an SEC internal control breach case

Last year, the Securities and Exchange Commission (SEC) filed charges against Morningstar Credit Ratings (MCR) for disclosure breaches and internal control deficiencies. MCR agreed to pay a civil penalty of $1.15 million to settle the claims.

The final judgement entered by the U.S. District Court for the Southern District of New York on Tuesday concludes the case that began 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 in 2015 and 2016 and "allowed analysts to make undisclosed adjustments to key stresses in the model it used to determine 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.”

In addition, the SEC asserted that MCR's internal control system "lacked features required to evaluate whether its analysts executed the 'loan-specific' stress adjustments effectively." This omission was deemed significant by the agency.

In consenting to the entry of a final judgement, MCR neither accepted nor rejected the SEC's conclusions.

MCR is no longer an active credit rating agency. A business spokesman stated at the time the SEC issued its complaint that the agency "exceeded its regulatory boundaries by setting rules that would govern the substance of credit-rating techniques" and that MCR was evaluating the claims.



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