Financial data firm DBRS Morningstar has agreed to pay $8 million in settlements with the Securities and Exchange Commission over alleged improprieties linked to its assessment of commercial mortgage-backed securities loans.
It’s a deal that highlights the power ratings agencies have over borrowers and bondholders in securitized debt markets — and the potential consequences of employing practices deemed to lack transparency during analyses of risks posed by financial instruments.
Morningstar announced the resolution of the SEC probes during a discussion with investors Monday. The SEC was set to initiate cease-and-desist proceedings against Morningstar, but before those took place, the company offered to settle the two cases initiated by regulators. It admitted to violations of federal securities law in just one of the charges. The agency issued two orders outlining the settlements late last month, records show.
In one of the orders, the SEC claimed that Morningstar didn’t properly disclose how it determined credit ratings for CMBS packages. The agency accused Morningstar of adjusting the ratings “in a manner not guided or described by DBRS’s published procedures or methodologies.” The agency estimated that the violations occurred between July 2019 and November 2022.
“By failing to include guidance for or a description of the systematic adjustments in DBRS’s published procedures or methodologies, DBRS’s internal control structure was ineffective in governing implementation of and adherence to its published procedures and methodologies for determining credit ratings,” the SEC order read.
Morningstar declined to comment.
The other allegations included in the settlements relate to the firm’s record-keeping practices. According to the SEC memo, employees at the firm, including those in senior levels, discussed credit ratings via text messages. The agency said that Morningstar failed to keep a record of the discussions, in violation of securities laws, following a rollout of new company-issued phones last year.
The total settlement amount includes $2 million relating to the CMBS case and $6 million for the record-keeping violations. Morningstar only acknowledged wrongdoing in the record-keeping case.
Morningstar acquired credit ratings firm DBRS in 2019 for $669 million. On its website Morningstar claims to be the fourth-largest credit rating agency in the world, rating over 4,000 issuers and 60,000 securities.
The resolutions come a year after a similar CMBS settlement between the two parties. According to a previous report from Reuters, Morningstar agreed to pay $1.2 million over improper adjustments to the credit ratings of $30 billion-worth of mortgage securities. The payout related to 30 CMBS transactions from 2015 to 2016.
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