S&P Global Ratings fined $2.5m for conflict of interest in mortgage-backed security

Rick Steves

“NRSROs are prohibited from issuing or maintaining a credit rating where an individual who participates in sales and marketing activity seeks to influence the determination of the rating. Credit rating agencies play a systemically important role in the structured products markets, and the federal securities laws require them to insulate their analytical functions from the influence of business considerations.”

The Securities and Exchange Commission has charged S&P Global Ratings with violating conflict of interest rules designed to prevent sales and marketing considerations from influencing credit ratings.

The SEC-registered statistical rating organization (NRSRO) agreed to settle the matter by paying a $2.5 million penalty and agreeing to the entry of a cease-and-desist order, a censure, and compliance with certain undertakings.

The SEC’s investigation took place following S&P’s initiative of self-reporting the conduct at issue with the regulator. The ratings agency also cooperated with said investigation and took remedial steps to enhance its conflicts of interest policies and procedures.

S&P analytical employees were pressured to maintain preliminary rating that contained calculation error

According to the SEC, an issuer engaged S&P to rate a jumbo residential mortgage-backed security transaction in July 2017, and over a five-day period, S&P commercial employees responsible for managing the relationship with the issuer attempted to pressure the S&P analytical employees – the ones responsible for evaluating and assigning the rating.

S&P analytical employees were pressured to rate the transaction consistent with preliminary feedback the analytical employees had given the customer that turned out to include a calculation error.

The SEC found that some emails sent by the S&P commercial employees to the S&P analytical team contained statements reflecting sales and marketing considerations.

The content, urgent nature, high volume, and compressed timing of the communications allegedly implies the S&P commercial employees became participants in the rating process during a time when they were influenced by sales and marketing considerations.

Osman Nawaz, Chief of the SEC’s Complex Financial Instruments Unit, said: “NRSROs are prohibited from issuing or maintaining a credit rating where an individual who participates in sales and marketing activity seeks to influence the determination of the rating. Credit rating agencies play a systemically important role in the structured products markets, and the federal securities laws require them to insulate their analytical functions from the influence of business considerations.”

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