Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, January 21, 2015

S&P to pay $80 million, take ‘timeout’ over CMBS hijinks

By Jacquelyn Lumb and Anne Sherry, J.D.

Standard & Poor’s has agreed to pay nearly $80 million to the SEC, New York, and Massachusetts to settle charges that it failed to adhere to its own criteria for rating commercial mortgage-backed securities (CMBS). The agreements, which also require S&P to take a year off from rating conduit fusion CMBS transactions, resolve the first-ever enforcement actions against a major ratings firm.

“Egregious” conduct. In a news conference following the announcement of the S&P action, Enforcement Director Andrew Ceresney stated that SEC-registered rating agencies (NRSROs) such as S&P play a vital role in the integrity of the markets, so it is critical that they provide accurate ratings that are consistently applied and free of outside influence. S&P’s behavior was egregious because it lied about the criteria it used in its ratings. The SEC found that S&P committed intentional fraud well after the financial crisis, which reflected a deep cultural failure and a failure to learn lessons from the financial crisis, he said.

Specifically, the SEC and state prosecutors charged S&P with fraudulently representing to the public that it was using one approach for rating conduit fusion CMBS when it actually used a different methodology in 2011 to rate six such CMBS transactions and issue preliminary ratings on two others. S&P will pay $42 million to the SEC, $12 million to New York, and $7 million to Massachusetts, along with taking a one-year “timeout” from rating domestic conduit fusion CMBS transactions. The rating agency did not admit or deny the orders’ findings.

Individual and institutional wrongdoing. When asked why the SEC did not require an admission of wrongdoing in this matter, Ceresney said the SEC, along with the New York and Massachusetts attorneys general, agreed that the factual admissions were appropriate in this case. The SEC’s order includes two pages of very detailed facts, and there will be a full factual airing of the findings in the litigated administrative proceeding against former S&P executive Barbara Duka.

Duka is seeking declaratory and injunctive relief preventing the SEC from bringing administrative proceedings against her, maintaining that the proceedings violate Article II of the Constitution. When asked about Duka’s challenge, Ceresney said it repeats some of the allegations that have already been brought in other actions. The SEC believes the allegations are without merit.

Other orders. S&P also settled SEC charges that it published new ratings criteria based on a flawed research study in order to reenter the market for rating conduit fusion CMBS after having been frozen out in late 2011. Finally, the ratings agency and the Commission settled allegations of internal controls violations. S&P will pay $15 million and $1 million in penalties under those two orders, respectively.

Sending a message. Ceresney reported that this is the first SEC action against a major NRSRO under the new rules that were adopted in response to the financial crisis. The significant sanctions imposed on S&P reflect the magnitude of its misconduct. Ceresney talked about the first-time use of a creative method of relief that requires S&P to take a one-year timeout from rating conduit fusion CMBS. There is no precedent for that, he said. The timeout carries with it a stigma, as does the requirement to publicly retract the false data in its study about the ability of the CMBS to withstand Great Depression-era levels of economic stress.

Ceresney said the hope is that the significant undertakings to which S&P agreed will result in a cultural change and that the SEC’s actions will spur the type of change that will be positive for the industry.

The Office of Credit Ratings (OCR) examines the credit rating agencies annually, and Ceresney said you can bet the staff will look closely at S&P to see if the mandated changes were made. OCR is the major mechanism through which the SEC monitors credit rating agencies, he added, and it was an excellent partner in the S&P investigation.

S&P statement. McGraw-Hill, S&P’s parent, announced the settlements in a press release, emphasizing that the orders do not affect any outstanding S&P credit ratings or the manner in which the rating agency conducts credit analysis under the relevant criteria. The company said that S&P “is pleased to have concluded these matters. It takes compliance with regulatory obligations very seriously and continues to make investments in people and technology to strengthen its controls and risk management throughout the organization.”

Companies: Standard & Poor’s Ratings Services; McGraw Hill Financial, Inc.

MainStory: TopStory CreditRatingAgencies Enforcement FraudManipulation MassachusettsNews NewYorkNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.