Morningstar Inc. allowed credit rating analysts to adjust financial models that resulted in better conditions for bond issuers and in some cases less interest income for investors, the Securities and Exchange Commission said in a civil lawsuit Tuesday.
The undisclosed adjustments were made to 30 $ 30 billion commercial mortgage-backed securities, the SEC said in the lawsuit filed in Manhattan federal court. The SEC claimed the changes were material, meaning investors relying on the ratings should have been informed about them.
Morningstar is pushed to become a major player in the bond rating industry through 2019 rival DBRS Inc. from two private equity firms for $ 669 million. In May 2020, Morningstar paid $ 3.5 million to settle a separate SEC enforcement investigation alleging that a former rating division violated its conflict of interest rules by combining rating work with sales and marketing efforts.
Morningstar said in a statement that it followed all laws and regulations. The SEC did not claim credit ratings were incorrect, the company said. “The SEC exceeded its legal restrictions by imposing requirements that would regulate the content of credit assessment methodologies,” the company said. Morningstar prides itself on the integrity and independence of its research and analysis. Morningstar will remain motivated by the goal of bringing clarity and diverse opinions to the market. “
Regulators have scrutinized credit rating agencies and their conflicts of interest as the company was criticized for giving rosy assessments of troubled real estate securities before the 2008 financial crisis. Credit rating agencies are paid by entities that sell debt, prompting issuers to look for the best ratings and hire a company that gives the most favorable numbers.