Morningstar to pay $1.15 million to settle SEC mortgage claims

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People leave the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, DC, U.S., May 12, 2021. REUTERS/Andrew Kelly

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  • SEC sued last year over mortgage-backed securities ratings
  • Lawsuit alleged inadequate disclosures and internal controls
  • Deal requires SEC and judge approval

(Reuters) – Morningstar Inc has tentatively agreed to pay a $1.15 million fine to settle with the U.S. Securities and Exchange Commission over its rating of commercial mortgage-backed securities in 2015 and 2016.

Last year, the SEC sued Morningstar’s former credit rating unit in Manhattan federal court, alleging it violated securities laws by letting analysts adjust credit rating models to about $30 billion in mortgage-backed securities, which resulted in lower payments to investors.

In a quarterly report filed Friday, the company revealed it had agreed to settle the lawsuit on April 12 without admitting wrongdoing. The deal requires internal SEC approval and the signature of U.S. District Judge Ronnie Abrams.

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An SEC spokesperson declined to comment, and Morningstar did not immediately respond to a request for comment on Monday. The company said in its filing that the fine will not have a significant impact on its operations.

Chicago-based Morningstar is also known for its investment research, including mutual funds and asset management.

In a complaint last February, the SEC said Morningstar violated securities laws by allowing analysts to make undisclosed adjustments to the underlying “key stress” ratings for 30 CMBS trades.

The SEC said this sometimes benefits issuers paying for ratings by lowering the resulting interest rates owed to investors.

Abrams cut the filing in January, rejecting a claim that Morningstar Credit Ratings had not identified which version of the methodologies it used to determine individual credit ratings.

The judge said the agency could pursue allegations that Morningstar failed to provide users with a general understanding of its commercial mortgage-backed securities rating methodology and lacked effective internal controls over its ratings process.

The SEC sued Morningstar Credit Ratings LLC, which no longer offers credit ratings. Morningstar Inc now operates credit ratings through its subsidiary DBRS Morningstar.

The case is SEC v Morningstar Credit Ratings LLC, US District Court, Southern District of New York, No. 21-01359.

For the SEC: James Connor

For Morningstar: Benjamin Mundel of Sidley Austin

Read more:

U.S. judge restricts SEC lawsuit against Morningstar over undisclosed bond rating changes

US SEC sues Morningstar over commercial mortgage-backed securities ratings

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Jody Godoy

Thomson Reuters

Jody Godoy reports on banking and securities law. Contact her at [email protected]

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