Standard & Poor’s Ratings Services (S&P) has reached a settlement agreement with the U.S. Securities and Exchange Commission (SEC) and state regulators to pay a $77 million fine and be barred from rating commercial mortgage-backed securities for one year in a civil action over its ratings that the SEC alleged were misleading to investors.
According to a Reuters article, S&P is also “close to an agreement” to pay more than $1.3 billion to settle U.S. Department of Justice suits over mortgage ratings that the SEC alleges led to the 2008 financial crisis.
Under the current agreement, S&P will pay $58 million to settle the SEC claims and $19 million to settle cases brought by attorneys general in New York and Massachusetts involving post-2011 ratings.
The SEC said its investigation showed that S&P mislead investors by misrepresenting the methodology it used to rate six different CMBS products and that the ratings firm lacked internal controls. In addition, the SEC investigation found internal control failures in S&P’s oversight of residential mortgage-backed securities (RMBS) ratings from 2012 to 2014.
In total, the SEC found that S&P violated Section 17(a)(1) of the Securities Act (fraud), Section 15E(c)(3) of the Securities Exchange Act (internal controls violations), Securities Exchange Rules 17g-2(a)(2)(iii) (books and records violations), Rule 17g-2(a)(6) (books and records violations), and 17g-2(a)(2)(iii) (failure to maintain records explaining differences between numerical model output and ratings).
S&P did not admit or deny wrongdoing in the settlement, which affected securities issued by conduit lenders — those that originate commercial mortgages to package into securities and sell to investors.
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