SEC Settles Charges Against Ratings Agencies Relating to Alleged Recordkeeping Failures

Who may be interested: Registered Investment Companies.

Quick Take: The SEC recently settled charges against two credit rating agencies for alleged violations relating to recordkeeping, disclosure and internal controls. The recordkeeping violations related to the failure by the agencies to maintain and preserve off-channel electronic communications made by their employees on personal and work-issued devices. The alleged disclosure and internal control violations related to one agency’s ratings of certain commercial mortgage-backed securities (CMBS).

The SEC settled charges against both rating agencies relating to their failure to preserve off-channel communications made by their employees, including senior level employees, on their personal and work-issued devices. The off-channel communications included discussions about initiating, determining, and adjusting credit ratings. As a result, the SEC orders found each rating agency violated Section 17(a) of the Exchange Act and Rule 17g-2(b)(7) thereunder. The rating agencies admitted to the facts set forth in their respective orders and each agreed to a cease-and-desist order, a censure, and to pay civil penalties, which combined totaled $10 million.

Additionally, the SEC settled charges with one of the rating agencies relating to an allegation that in rating certain multi-borrower CMBS transactions from July 2019 to November 2022, the agency made systematic adjustments to credit enhancement levels implied by the results of a quantitative predictive model, in a manner not guided or described by the agency’s published procedures and methodologies. The SEC order also found that between November 2019 and March 2020, the rating agency failed to accurately identify the rating methodology it used to rate certain single-asset/single-borrower (SASB) CMBS transactions and failed to enforce its policies and procedures requiring credit ratings to be determined and issued based on approved methodologies. The SEC order found the agency violated Section 15E(c)(3)(A) of the Exchange Act and Rules 17g-7 and 17g-8 thereunder. Without admitting or denying the facts set forth in the SEC order, the rating agency agreed to a cease-and-desist order, a censure, and to pay a civil penalty totaling $2 million.

The SEC’s Press Release on the three SEC orders can be found here.