U.S. Securities and Exchange Commission building in Washington. (Photo: New York Law Journal) September 4, 2014. Photo by Diego M. Radzinschi/THE NATIONAL LAW JOURNAL.
Moody's Investors Service Inc., one of the nation's largest credit ratings agencies, agreed to pay a total of $16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols, according to an announcement from the Securities and Exchange Commission.
This marks the first time the SEC has filed an enforcement action involving rating symbol deficiencies.
Moody's agreed to pay $15 million to settle charges of internal controls failures involving models it used in rating U.S. residential mortgage-backed securities (RMBS) and will retain an independent consultant to assess and improve its internal controls. Moody's separately agreed to pay $1.25 million and to review its policies, procedures and internal controls regarding rating symbols. Moody's did not admit or deny the SEC's charges.
"Rating agencies play a critical role in our capital markets and need to have effective controls over their rating processes," said Antonia Chion, associate director of the SEC's division of enforcement, in a statement. "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."
According to the SEC's order in the internal controls proceeding, Moody's failed to establish and document an effective internal control structure as to models that Moody's had outsourced from a corporate affiliate and used in rating RMBS from 2010 through 2013.
Moreover, the SEC said that Moody's failed to maintain and enforce existing internal controls that should have been applied to the models.
