SEC settles with ratings agency for $2 million over inadequate policies

Securities SEC Commercial Mortgage Backed Securities

On September 29, the SEC announced a credit ratings agency agreed to pay more than $2 million to resolve separate charges alleging the agency’s commercial mortgage-backed securities (CMBS) and collateralized loan obligation combination notes (CLO Combo Notes) policies and procedures were insufficient. According to the CMBS order, in violations of Section 15E(c)(3)(A) of the Securities Exchange Act, the agency allowed analysts to “use their professional judgment” to make adjustments, which had material effects on final CMBS ratings, without an analytical method to follow nor a requirement to document the rationale for the adjustments. Moreover, according to the CLO Combo Notes order, in violations of Rule 17g-8(b)(1) of the Exchange Act, the agency failed to establish and maintain policies and procedures that addressed the probability that CLO Combo Notes issuers may “default, fail to make timely payments, or otherwise not make payments to investors.”

Without admitting or denying the SEC’s allegations, the agency agreed to pay a civil penalty of $1.25 million in the CMBS action, a $600,000 civil penalty in the CLO Combo Notes action, and $160,000 in disgorgement and prejudgment interest into a Fair Fund for affected persons.