SEC charges ratings agency S&P over ratings

January 27 04:31 2015

Securities and Exchange Chairman Mary Jo White banned the world’s largest credit rater, Standard & Poor’s, from a large part of the mortgage market for one year. In her toughest action since the mortgage crisis that nearly collapsed the banks, ratings agency Standard & Poor’s has agreed to a year-long ban from rating a segment of the commercial mortgage-backed securities market (CMBS) because of ratings it issued in 2011 that regulators say were misleading.

The suspension is part of a settlement with the SEC as well as the attorney generals of New York and Massachusetts, and is tied to $1.5 billion worth of CMBS that S&P graded in early 2011. S&P pulled the ratings a few months later, saying it had to review a potential problem in its models — causing market disruptions. This prompted an investigation by the SEC and the two attorney generals, which discovered that S&P had departed from its published criteria and went with assumptions that were less conservative than advertised.

“In the wake of the housing crisis and the collapse of the global economy, credit agencies like S&P promised not to contribute to another bubble by inflating the ratings on products they were paid to evaluate,” said New York Attorney General Eric Schneiderman said in a press release about the settlement. “Unfortunately, S&P broke that promise in 2011, lying to investors about their profits and market share.” Specifically, the SEC banned S&P from rating new U.S. conduit-fusion CMBS transaction until January 21, 2016. These are securities backed by pools of loans secured by commercial real estate, such as mortgages for shopping malls or skyscrapers. They include a financial intermediary, often a bank, that acts as a link between the lender and the investor.

S&P, a unit of publishing house McGraw Hill, will also pay close to $77 million in fines, including $12 million to New York and $7 million to Massachusetts. In total, the SEC issued three proceedings against S&P related to the 2011 bonds as well as the rating agency’s effort to get back into the market in 2012, after it had pulled the faulty ratings. S&P “made certain admissions” regarding the first order tied to the misrepresentation of the 2011 bonds, the SEC said. White’s mission, when she took the office in 2013, was to not allow companies to settle without admitting wrongdoing — a practice that had come under scrutiny in the courts.