Morningstar agreed to pay $3.5 million to settle charges by the Securities and Exchange Commission that its New York-based credit rating division, Morningstar Credit Ratings, violated a conflict of interest rule designed to separate credit ratings and analysis from sales and marketing efforts.
Without admitting or denying the findings, the firm agreed to pay the civil money penalty to the SEC for transfer to the general fund of the U.S. Treasury Department, according to the SEC’s order posted on its website Friday.
The SEC’s order found that from mid-2015 through September 2016, credit rating analysts in Morningstar’s asset-backed securities group engaged in sales and marketing to prospective clients, the regulator said. 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.
As one example, the order found that one ABS analyst at Morningstar wrote a commentary specifically targeted at a potential client issuer and sent it to the issuer for the purpose of obtaining the business of the issuer, who eventually became a Morningstar client, the SEC said.
The order also found 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.
Additionally, the order found 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, the SEC said.
The SEC’s order found 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, as well as 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, the regulator said.