SEC Imposes $77 Million Fine on Standard & Poor's for Credit Rating Misconduct

Strategic Insights -

Standard & Poor's (S&P) agreed to pay over $77 million in fines and penalties to settle federal securities law violations for its fraudulent misconduct in rating certain commercial mortgage-backed securities (CMBS) in 2011. The settlement includes a $58 million payment to the Securities and Exchange Commission (SEC) and an additional $19 million to settle parallel cases announced by the New York Attorney General's office and the Massachusetts Attorney General's office. This marks the first time a major ratings firm has been subject to enforcement actions by the SEC.

Key Takeaways:

  • S&P was found to have engaged in fraudulent misconduct by loosening its rating criteria to obtain business and then obscuring these changes from investors, in violation of Section 17(a)(1) of the Securities Act and Section 15E(c)(3) of the Securities Exchange Act.
  • S&P agreed to take a one-year timeout from rating conduit fusion CMBS and to publicly retract a false and misleading study related to the Great Depression, while also correcting inaccurate descriptions in a formal publication about its criteria.
  • The SEC issued three orders instituting settled administrative proceedings against S&P, including one related to internal controls failures in monitoring residential mortgage-backed securities (RMBS) ratings.
  • S&P self-reported the misconduct related to internal controls failures and cooperated with the investigation, resulting in a reduced penalty for the firm.
  • The Enforcement Division's Complex Financial Instruments Unit led the investigation, which was conducted in coordination with the SEC's Office of Credit Ratings and the New York and Massachusetts Attorney General's offices.

Statistics:

  • $58 million settlement with the SEC
  • $19 million in settlements with the New York and Massachusetts Attorney General's offices
  • $77 million total fine and penalty for S&P
  • $12 million paid to the New York Attorney General's office
  • $7 million paid to the Massachusetts Attorney General's office
  • June 2014 date for internal controls failures in monitoring RMBS ratings
  • October 2012 to June 2014 period for internal controls failures in monitoring RMBS ratings
  • Six conduit fusion CMBS transactions in 2011 that were rated under a different methodology than publicly disclosed
  • Two conduit fusion CMBS transactions in 2011 for which preliminary ratings were issued under a different methodology than publicly disclosed

Sources:

  • SEC Statement - Andrew J. Ceresney and Michael J. Osnato
  • (M2 Communications via COMTEX, Jan 21, 2015)
  • SEC Orders (no date mentioned)
  • SEC's website and publication (no date mentioned)