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Regulation and Compliance > Federal Regulation > SEC

SEC Fines S&P Global Ratings $2.5M Over Conflicts of Interest

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The Securities and Exchange Commission late Monday charged S&P Global Ratings with violating conflict of interest rules designed to prevent sales and marketing considerations from influencing credit ratings.

S&P agreed to pay a $2.5 million penalty to settle the charges.

The SEC’s order finds that an issuer engaged S&P, a nationally recognized statistical rating organization (NRSRO) registered with the commission, to rate a jumbo residential mortgage backed security transaction in July 2017.

At that time, according to the SEC order, “S&P had not rated a prime ‘jumbo’ RMBS transaction in over two years and had not rated any transaction for this issuer since early 2015. S&P commercial employees viewed the engagement as a very positive development for S&P and its RMBS rating business.”

According to the order, “over a five-day period in August 2017, S&P commercial employees —  employees responsible for managing the relationship with the issuer — on several occasions attempted to pressure the S&P analytical employees — employees responsible for evaluating and assigning the rating — to rate the transaction consistent with preliminary feedback the analytical employees had given the customer that turned out to include a calculation error,” the SEC said.

Despite sending the communications through the compliance department as required by S&P’s policies and procedures at that time, the SEC continued, “some emails sent by the S&P commercial employees to the S&P analytical team contained statements reflecting sales and marketing considerations.”

The SEC order finds that, “as a result of the content, urgent nature, high volume and compressed timing of the communications, the S&P commercial employees became participants in the rating process during a time when they were influenced by sales and marketing considerations.”

Osman Nawaz, chief of the SEC’s Complex Financial Instruments Unit,. said Monday in a statement that “NRSROs are prohibited from issuing or maintaining a credit rating where an individual who participates in sales and marketing activity seeks to influence the determination of the rating.”

Credit rating agencies, Nawaz said, “play a systemically important role in the structured products markets, and the federal securities laws require them to insulate their analytical functions from the influence of business considerations.”

After discovering the circumstances surrounding the rating of the transaction, S&P self-reported the conduct at issue to the SEC, cooperated with the SEC’s investigation, and took remedial steps to enhance its conflicts of interest policies and procedures.

The order finds that, by issuing and maintaining these credit ratings, S&P violated certain rules promulgated under the Securities Exchange Act of 1934, which prohibit conflicts of interest at NRSROs, and also failed to establish, maintain and enforce written policies and procedures designed to ensure compliance with those rules.

Without admitting or denying the SEC’s findings, S&P agreed to pay a $2.5 million penalty and agreeing to the entry of a cease-and-desist order, a censure, and compliance with certain undertakings.


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