A credit rating agency agreed to pay $15 million to settle SEC charges that it allegedly failed to maintain, enforce and document existing internal controls that should have been applied to its use of certain models for rating U.S. residential mortgage-backed securities ("RMBS"). Separately, the same credit rating agency agreed to pay $1.25 million to settle SEC charges that it failed to consistently apply and clearly define its credit rating symbols.
According to the first settlement order, from 2010 to 2013, Moody's Investors Service, Inc. ("MIS") used erroneous rating models that resulted in incorrect ratings for RMBS collectively valued at over $49 billion. In particular, the SEC alleged that the models developed were flawed because the firm did not establish a consistent or rigorous quality control process over the coding of such models. As a result of the absence of quality control, the rating agency failed to timely detect and prevent numerous errors in the models. In addition, the SEC found that MIS did not take adequate action after it became aware of numerous red flags regarding the unreliability of its RMBS rating methodology. In light of these failures, the SEC charged MIS with violating Exchange Act Section 15E(c)(3)(A) (which requires nationally recognized statistical rating organization ("NRSROs") to have in place and adhere to internal controls relating to their credit rating methodologies) and related recordkeeping requirements under Exchange Act Section 17.
In the other Order, the SEC alleges that MIS assigned ratings to 26 securities referred to as "combo notes" (described in the order as resecuritizations of CLO tranches) in a way that was inconsistent with other types of securities that also used the same rating symbols. As a result, the SEC alleged that MIS violated Exchange Act Rule 17g-8(b)(2) and (3), which requires NRSROs to have procedures for achieving the "objective of consistency" in use of credit ratings.
MIS neither admitted to nor denied the charges.
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