Securities Regulation Daily SEC orders Morningstar to pay $3.5 million for conflicts of interest violations
Friday, May 15, 2020

SEC orders Morningstar to pay $3.5 million for conflicts of interest violations

By Joanne Cursinella, J.D.

Morningstar Credit Ratings LLC agreed to pay the penalty without admitting or denying the Commission’s findings.

The SEC charged New York-based credit rating agency Morningstar Credit Ratings LLC with violating a conflict of interest rule designed to separate credit ratings and analysis from sales and marketing efforts. Morningstar agreed to pay $3.5 million to settle the charges and committed to other remedies related to the charged provisions (In the Matter of Morningstar Credit Ratings, LLCRelease No 34-88880, May 15, 2020).

Exchange Act violations. According to the Commission’s order, Morningstar violated Exchange Act Rule 17g-5(c)(8)(i), a conflict of interest rule intended to insulate rating analysts from business pressures by separating rating agencies’ "business getting function" from their analytical (that is, rating-determining) function, by issuing or maintaining credit ratings for which the agency’s employees who participated in determining or monitoring the credit ratings also participated in the sales or marketing of a Morningstar product or service.

The order finds that, despite the existence of the Exchange Act rule, from mid-2015 through September 2016, asset-backed securities (ABS) analysts at Morningstar identified and contacted prospective clients to arrange marketing calls and marketing meetings, offered to provide indicative ratings to potential clients, and had follow-up communications and interactions with prospective clients, all for the purpose of persuading potential clients to hire Morningstar to rate ABS.

The order finds that Morningstar issued and maintained ABS ratings for certain entities when an analyst who participated in determining or monitoring the credit rating also participated in the sales or marketing of a Morningstar product or service in violation of the rule.

Finally, in addition to violating the rule, the SEC found that, between at least June 2015 and November 2016, the agency failed to establish, maintain, and enforce written policies and procedures reasonably designed to ensure compliance with the rule and, therefore, violated Exchange Act Section 15E(h)(1).

Remedy. In addition to agreeing to pay the civil money penalty, Morningstar agreed to conduct training and implement changes to its internal controls, policies, and procedures related to the charged provisions.

"Credit rating agencies must be vigilant to prevent potential conflicts of interest between their ratings functions and their sales and marketing activities," said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. "As the SEC’s order finds, Morningstar sometimes enlisted its analysts in business development efforts, introducing the exact conflict of interest that the rule is intended to eliminate."

The release is No. 34-88880.

Companies: Morningstar Credit Ratings LLC

MainStory: TopStory CreditRatingAgencies Enforcement FraudManipulation NewYorkNews

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