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SEC Sues Morningstar for CMBS Disclosures
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On February 16, 2021, the Securities and Exchange Commission (“SEC”) filed a civil complaint against Morningstar Credit Ratings LLC (“Morningstar”), a credit rating agency, alleging violations of the disclosure and internal controls provisions of the federal securities laws based on Morningstar’s ratings of commercial mortgage-backed securities (“CMBS”).
1 In bringing this complaint, the SEC stressed the importance of internal controls measures and full disclosure of rating methodologies for credit rating agencies.
I. Allegations
According to the complaint, from 2015 to 2016, Morningstar permitted credit rating analysts to make undisclosed adjustments in its rating methodology for thirty CMBS transactions totaling $30 billion. Morningstar’s models stress-tested cash flows and valuation measures based on different economic environments, and Morningstar ultimately failed to disclose that its analysts could
(MENAFN - Newsfile Corp) SEC Charges Ratings Agency With Disclosure And Internal Controls Failures Relating To Undisclosed Model Adjustments
Washington, D.C. (Newsfile Corp. - February 16, 2021) - The Securities and Exchange Commission today filed a civil action alleging that former credit ratings agency Morningstar Credit Ratings LLC violated disclosure and internal controls provisions of the federal securities laws in rating commercial mortgage-backed securities (CMBS).
Credit ratings are used by market participants to help evaluate credit risk, price certain securities, and guide the investment decisions of individuals and institutional investors alike. To promote transparency in the process, the federal securities laws require credit rating agencies to publicly and accurately describe the procedures and methodologies used to determine credit ratings, and to implement effective internal controls to ensure that they follow those procedures and methodologies.