Morningstar Inc. allowed credit rating analysts to adjust financial models that resulted in better terms for bond issuers and, in some cases, less interest income for investors, according to the Securities and Exchange Commission on Tuesday. a civil lawsuit.
The undisclosed adjustments were made to 30 mortgage-backed commercial securities valued at $ 30 billion, the SEC said in the lawsuit filed in federal court in Manhattan. The SEC alleged that the changes were significant, so investors who relied on the ratings should have been informed.
Morningstar has made a push to become a big player in the bond rating business, buying rival DBRS Inc. to two privately held companies for $ 669 million in 2019. In May 2020, Morningstar paid $ 3.5 million to resolve an SEC enforcement investigation that claimed a former credit rating division violated the rules of conflict of interest in mixing skill work with sales and marketing efforts.
Morningstar said in a statement that it followed all laws and rules. The SEC did not allege that the credit ratings were incorrectly determined, the company said. “The SEC overcame its regulatory limitations by imposing requirements governing the substance of credit rating methodologies,” the firm said. “Morningstar is proud of the integrity and independence of its research and analysis. Morningstar will continue to be motivated by the goal of providing clarity and diverse opinions to the market.
Regulators have analyzed credit rating companies and their conflicts of interest since the business was criticized for valuing troubled real estate securities before the 2008 financial crisis. Credit appraisers are paid by entities that sell debts, which encourages an incentive for issuers to obtain the best ratings and hire a company that gives the most favorable ratings.