Morningstar Inc. allowed credit rating analysts to adjust financial models that led to better conditions for bond issuers and in some cases less interest income for investors, the Securities and Exchange Commission claimed in a civil case on Tuesday.
The unknown adjustments were made to 30 commercial mortgage-backed securities worth $ 30 billion, the SEC said in the lawsuit in federal court in Manhattan. The SEC claims the changes are substantial, meaning investors who rely on the ratings should have been told about it.
Morningstar has made great efforts to become a major player in the power rating and competitor DBRS Inc. of two private equity firms for $ 669 million in 2019. In May 2020, Morningstar paid $ 3.5 million to complete a separate SEC enforcement investigation. alleges that a former credit rating division violated the rules of conflict of interest by mixing rating work with sales and marketing efforts.
Morningstar said in a statement that it follows all laws and rules. The SEC does not allege that credit ratings were set improperly, the company said. “The SEC has exceeded its restrictions on regulations by setting requirements that would regulate the content of credit rating methods,” the firm said. “Morningstar is proud of the integrity and independence of its research and analysis. Morningstar will continue to be motivated by the goal of bringing clarity and divergent opinions to market. ”
Regulators have been scrutinizing credit rating agencies and their conflicts of interest since the business was criticized for giving rosy ratings of troubled property bonds before the 2008 financial crisis. Credit rating agencies are paid by debt-selling businesses, which provide an incentive for issuers to seek the best ratings and hire a business that scores the most favorable.