SEC Charges Credit Ratings Agency with Disclosure and Internal Controls Violations

The SEC charged a former credit ratings agency with disclosure and internal controls failures in connection with undisclosed model adjustments.

In a Complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleged that the ratings agency allowed analysts to make undisclosed adjustments to the agency's model for calculating the rating for commercial mortgage-backed securities ("CMBS") transactions. According to the Complaint, while the agency disclosed its rating methodology, it failed to disclose that it permitted its analysts to modify key stresses on a "loan-specific" basis, an omission that the SEC determined was material. The SEC further alleged that, in several instances, the adjustments benefited the issuers paying for the ratings by enabling them to pay less interest to investors.

As a result, the SEC charged the ratings agency with failing to implement a sufficient internal control structure relating to the determination of its CMBS ratings, in violation of Section 15E ("Registration of Nationally Recognized Statistical Rating Organizations") of the Exchange Act and SEA Rules 17g-1 ("Application for Registration as a Nationally Recognized Statistical Rating Organization") and 17g-7 ("Report of Representations and Warranties").

The SEC is seeking injunctive relief, disgorgement with prejudgment interest and civil penalties.