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Remarkable – US Regulator SEC orders rating agency to pay millions for conflicts of interest violations

Last updated on May 20, 2020

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The US Securities and Exchange Commission (SEC) charged New York-based credit rating agency Morningstar Credit Ratings LLC for violating a conflict of interest rule designed to separate credit ratings and analysis from sales and marketing efforts. Without admitting or denying the findings Morningstar has agreed to pay $3.5 million to settle the charges. The case is remarkable because it shows once again that rating agencies are certainly pursuing their own interests and easily forget to be objective..

The Case

The SEC’s order finds that credit rating analysts in Morningstar’s engaged in sales and marketing to prospective clients. Morningstar’s head of business development instructed analysts to identify business targets and pursue them through marketing calls, meetings, and offers to provide indicative ratings.  Analysts at Morningstar wrote commentaries specifically aimed at potential clients and sent it to these prospects, some of which eventually became Morningstar clients. 

Credit rating agencies must be vigilant to prevent potential conflicts of interest between their ratings functions and their sales and marketing activities. As the SEC’s order finds, Morningstar sometimes enlisted its analysts in business development efforts, introducing the exact conflict of interest that the rule is intended to eliminate.

Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit

The Order

The SEC’s order finds that Morningstar violated Rule 17g-5(c)(8)(i), which prohibits a rating agency from issuing or maintaining a credit rating where an analyst who participates in determining or monitoring credit ratings also participates in sales and marketing activity, and Section 15E(h)(1) of the Securities Exchange Act of 1934, which requires credit rating agencies to establish, maintain, and enforce policies and procedures reasonably designed to address and manage conflicts of interest. Without admitting or denying the findings, Morningstar agreed to pay a $3.5 million penalty and committed to conduct training and implement changes to its internal controls, policies, and procedures related to the charged provisions.

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