Moody’s Investors Service, one of the nation’s largest credit ratings agencies, agreed to pay $16.25 million to the Securities and Exchange Commission (SEC) for internal control failures and not consistently applying credit rating symbols.
This is the first time the SEC has filed an enforcement action over rating symbol deficiencies.
Moody’s agreed to a $15 million penalty to settle charges of internal controls failures involving models it used in rating U.S. residential mortgage-backed securities (RMBS). It also agreed to retain an independent consultant to assess and improve its internal controls.
Separately, Moody’s agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols.
The SEC said Moody’s failed to establish and document an effective internal control structure for models it had outsourced from a corporate affiliate and used in rating RMBS from 2010 through 2013.
Further, the SEC said the credit rating agency didn’t enforce existing internal controls that should have been applied to the models. The company corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models. Also, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings on 54 different occasions.
“Rating agencies play a critical role in our capital markets and need to have effective controls over their rating processes,” Antonia Chion, associate director of the SEC’s Division of Enforcement, said. “As our order notes, the SEC put Moody’s on notice about its internal controls obligations, yet it did not develop an effective process to ensure the accuracy of the models it relied upon when rating residential mortgage-backed securities.”
Reid Muoio, deputy chief of the Enforcement Division’s Complex Financial Instruments Unit, said investors expect symbols used by rating agencies to be clearly defined and consistently applied.
“Today’s proceeding is the SEC’s first enforcing the Universal Ratings Symbol requirement, and we will continue to pursue failures that render rating symbols unclear or inconsistent,” Muoio said.