Rate Expectations: SEC Charges Credit Ratings Agency For Undisclosed Adjustments to Ratings | Vinson & Elkins LLP

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On February 16, 2021, the Securities and Exchange Commission (“SEC”) filed a civil complaint against Morningstar Credit Ratings LLC (“Morningstar”), a credit rating agency, alleging violations of the disclosure and internal controls provisions of the federal securities laws based on Morningstar’s ratings of commercial mortgage-backed securities (“CMBS”).
1 In bringing this complaint, the SEC stressed the importance of internal controls measures and full disclosure of rating methodologies for credit rating agencies.
I. Allegations
According to the complaint, from 2015 to 2016, Morningstar permitted credit rating analysts to make undisclosed adjustments in its rating methodology for thirty CMBS transactions totaling $30 billion. Morningstar’s models stress-tested cash flows and valuation measures based on different economic environments, and Morningstar ultimately failed to disclose that its analysts could change stress-testing factors to benefit issuers. The SEC alleges that adjustments were “overwhelmingly used to ease those stresses, which lowered expected losses for many classes” of bonds that Morningstar rated.

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