US Securities and Exchange Commission - VALIC

SEC Orders Credit Rating Agency to Pay $3.5 Million for Conflicts of Interest Violations

SEC - Credit RatingWashington D.C., May 15, 2020 — The Securities and Exchange Commission today charged New York-based credit rating agency Morningstar Credit Ratings LLC for violating a conflict of interest rule designed to separate credit ratings and analysis from sales and marketing efforts. Morningstar has agreed to pay $3.5 million to settle the charges.

The SEC’s order finds that from mid-2015 through September 2016, credit rating analysts in Morningstar’s asset-backed securities (ABS) group engaged in sales and marketing to prospective clients. According to the order, Morningstar’s head of business development instructed analysts to identify business targets and pursue them through marketing calls, meetings and offers to provide indicative ratings.  For example, the order finds that one ABS analyst at Morningstar wrote a commentary specifically aimed at a potential client issuer and sent it to the issuer for the purpose of obtaining the business of the issuer, which eventually became a Morningstar client.  The order further finds that Morningstar issued and maintained ABS ratings for certain entities where an analyst who participated in determining or monitoring the credit rating also participated in the sales or marketing of a Morningstar product or service.  In addition, the order finds that between at least June 2015 and November 2016, Morningstar failed to maintain written policies and procedures reasonably designed to sufficiently separate the firm’s analytical and business development functions.

“Credit rating agencies must be vigilant to prevent potential conflicts of interest between their ratings functions and their sales and marketing activities,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “As the SEC’s order finds, Morningstar sometimes enlisted its analysts in business development efforts, introducing the exact conflict of interest that the rule is intended to eliminate.”

The SEC’s order finds that Morningstar violated Rule 17g-5(c)(8)(i), which prohibits a rating agency from issuing or maintaining a credit rating where an analyst who participates in determining or monitoring credit ratings also participates in sales and marketing activity, and Section 15E(h)(1) of the Securities Exchange Act of 1934, which requires credit rating agencies to establish, maintain, and enforce policies and procedures reasonably designed to address and manage conflicts of interest. Without admitting or denying the findings, Morningstar agreed to pay a $3.5 million penalty and committed to conduct training and implement changes to its internal controls, policies, and procedures related to the charged provisions.

The SEC’s investigation was conducted by Robert Leidenheimer of the Complex Financial Instruments Unit and Colin Forbes of the Boston Regional Office with the assistance of Senior Trial Counsel Al Day, and was supervised by Assistant Director Celia Moore.