Morningstar Credit Ratings has agreed to pay the Securities & Exchange Commission $3.5 million for violating conflict of interest rules.
Analysts who performed credit ratings at Morningstar also engaged and marketing and sales to potential clients between 2015 and 2016, the SEC claimed in a Friday announcement.
Morningstar did not have to admit or deny the SEC’s charges but agreed to pay the fine, it said Friday.
“Credit rating agencies must be vigilant to prevent potential conflicts of interest between their ratings functions and their sales and marketing activities,” said Daniel Michael, chief of the enforcement division’s complex financial instruments unit, in a statement.
Morningstar’s head of asset-backed securities business development allegedly told analysts to identify potential clients and then call and meet with them to market Morningstar’s services. In some cases, analysts offered “indicative ratings” to potential clients, which were higher than other competitors’ ratings at the time, the SEC order said.
In one alleged instance, an analyst participated in a marketing call with one company, then wrote and published commentary on the company about the strength of credit notes in certain deals. After publishing the commentary, the analyst allegedly followed up with the company, requesting a meeting.
According to the SEC, the analyst’s actions “did not immediately yield fruit,” but the company did eventually hire Morningstar to rate a securitization.
The SEC also claimed that Morningstar failed to maintain written policies for separating marketing and analysis between June 2015 and November 2016.
Morningstar “takes its regulatory obligations seriously, and the integrity of its credit ratings is of paramount importance,” the company said in a statement Friday.
In 2019, Morningstar acquired DBRS, a Canadian credit ratings agency. The firm also revamped its rating methodology in 2019, which included placing more emphasis on fees and setting a higher bar for active managers in its portfolio.
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“As part of its integration with DBRS, which Morningstar acquired last year and well after the investigated activity took place, the combined DBRS Morningstar has enhanced and will further strengthen policies, procedures, and internal controls,” according to the Friday statement.