Morningstar Inc. allowed credit rating analysts to adjust financial models that led to better terms for bond issuers and, in some cases, less interest income for investors, the Securities and Exchange Commission said in a civil lawsuit on Tuesday.
The undisclosed adjustments were made to 30 mortgage-backed commercial securities valued at $ 30 billion, the SEC said in a lawsuit in federal court in Manhattan. The SEC argued that the changes were significant, meaning that investors who relied on the rating should have been told about them.
Morningstar has made an effort to become a major player in the bond rating business by buying rival DBRS Inc. from two private equity firms for $ 669 million in 2019. In May 2020, Morningstar paid $ 3.5 million to settle a separate SEC enforcement investigation alleging that a former credit rating division violated conflict rules of interests by mixing rating activity with sales and marketing efforts.
Morningstar said in a statement that it complied with all laws and rules. The SEC did not claim that the credit ratings were improperly determined, the company said. “The SEC has exceeded its regulatory limitations by imposing requirements that would regulate the substance of credit rating methodologies,” the firm said. “Morningstar is proud of the integrity and independence of its research and analysis. Morningstar will continue to be motivated by the goal of bringing clarity and diverse opinions to the market. ”
Regulators have examined credit rating firms and their conflicts of interest, as the business has been criticized for making troubled valuations of troubled securities before the 2008 financial crisis. Credit assessors are paid by debt-selling entities. , which encourages issuers to shop for the best ratings and hire a company that gives the most favorable ratings.