New York-based credit rating agency Moody’s Investors Service Inc. has agreed to pay a total of US$16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols, the U.S. Securities and Exchange Commission today announced Tuesday.
“This marks the first time the SEC has filed an enforcement action involving rating symbol deficiencies,” the U.S. regulator says in a news release.
Moody’s agreed to pay US$15 million to settle charges of internal controls failures involving models it used in rating U.S. residential mortgage-backed securities (RMBS) and will retain an independent consultant to assess and improve its internal controls. Moody’s separately agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols. The credit rating agency did not admit or deny the SEC’s charges.
According to the SEC’s order, by failing to establish an effective internal control structure, Moody’s ultimately had to correct more than 650 RMBS ratings, with a notional value of over US$49 billion.
The SEC also found that Moody’s “failed to document its rationale” for issuing RMBS ratings that deviated from the ratings implied by its models; and, that it assigned ratings to so-called “combo notes” in a way that was inconsistent with other types of securities that used the same rating symbols.
“Investors expect and the law requires that symbols used by rating agencies be clearly defined and consistently applied,” says Reid Muoio, deputy chief of the SEC enforcement division’s complex financial instruments unit, in a statement. “Today’s proceeding is the SEC’s first enforcing the universal ratings symbol requirement and we will continue to pursue failures that render rating symbols unclear or inconsistent.”
“Rating agencies play a critical role in our capital markets and need to have effective controls over their rating processes,” says Antonia Chion, associate director of the SEC’s enforcement division, in a statement. “As our order notes, the SEC put Moody’s on notice about its internal controls obligations yet it did not develop an effective process to ensure the accuracy of the models it relied upon when rating residential mortgage-backed securities.”