The Securities and Exchange Commission has filed a civil suit against Morningstar Credit Ratings (MCR) for violations related to the ratings of 30 collateralized mortgage-backed securities in 2015 and 2016.
MCR ceased operations in late November 2020 after withdrawing all its credit ratings in October 2020 and its registration with the SEC in December 2019 and retiring its CMBS ratings methodology in 2018, according to a spokeswoman.
She said the SEC’s enforcement action relates solely to the legacy MCR, not to DBRS Morningstar, the credit ratings agency formed after Morningstar acquired the DBRS rating agency in July 2019.
The SEC’s Complaint
According to the SEC complaint, MCR violated disclosure and internal control provisions of the federal securities laws in rating commercial mortgage-backed securities when it permitted analysts to make undisclosed adjustments to key stresses in the model that it used in determining the rating for that transaction.
The undisclosed adjustments lowered the credit enhancement that Morningstar required for many of the ratings it awarded classes of the CMBS transactions, according to the SEC. These adjustments, in certain instances, benefited issuers because they could pay investors less interest as a result, the SEC says.
The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions.