Moody’s Investors Service will pay $16.25 million in penalties to settle separate charges from the Securities and Exchange Commission that its internal controls failed in the grading of U.S. residential mortgage-backed securities and the consistent application of ratings symbols.
The credit rater will pay $15 million for internal control failures tied to its RMBS ratings from 2010 through 2013, and has agreed to hire an independent consultant to assess and improve its controls, the SEC said in a statement Tuesday. Moody’s will separately pay $1.25 million to settle charges over the inconsistent use of ratings symbols, marking the first time the SEC has filed an enforcement action involving such deficiencies.
Under the settlements, Moody’s neither admitted nor denied the SEC's charges.
Due in part to errors in its models, Moody’s corrected more than 650 RMBS ratings, with a combined notional value exceeding $49 billion, during the three years from January 2013 to January 2016, according to the SEC's allegations. In its statement, the regulator also pointed to 54 instances in which Moody’s allegedly failed to document its rationale for issuing RMBS ratings that “deviated materially” from what its models implied.
“As our order notes, the SEC put Moody’s on notice about its internal controls obligations yet it did not develop an effective process to ensure the accuracy of the models it relied upon when rating residential mortgage-backed securities,” said Antonia Chion, associate director of the SEC’s Division of Enforcement, in the statement.
In 2010, the regulator put Moody’s on notice for its internal controls obligations in determining credit ratings, according to the SEC’s order, also issued Tuesday. In 2013, Moody’s hired outside consultants to review the process used in its ratings methodology, the regulator said. The consultants allegedly found errors in many of the models, so Moody’s began moving toward a more formal quality control process, according to the document.
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“We are pleased to have resolved these legacy matters, which reach back to 2010,” a spokesperson for Moody’s said via email Tuesday. “Moody’s Investors Service regularly reviews and refines its policies and procedures and is committed to maintaining strong controls around models used in the rating process.”
As for the charges relating to ratings symbols, the SEC alleged in a separate order Tuesday that Moody’s assigned 26 ratings on $2 billion of securities known as “combo notes” in a way that was inconsistent with other types of securities using the same grading symbols. The regulator said in the order that the combo notes are a type of re-securitization of collateralized loan obligations, or CLOs, which buy corporate loans.
“Investors expect and the law requires that symbols used by rating agencies be clearly defined and consistently applied,” Reid Muoio, the SEC's deputy chief of the enforcement division’s complex financial instruments unit, said in the statement on the charges against Moody's.