SEC Sues Morningstar's Former Credit Ratings Agency

The complaint also alleges that Morningstar failed to establish and enforce an effective internal control structure governing the adjustments for a total of 31 transactions.

The SEC complaint was filed Tuesday in U.S. District Court for the Southern District of New York. It charges Morningstar with violating disclosure and internal control provisions of the Securities Exchange Act of 1934 applicable to credit rating agencies, and seeks injunctive relief, disgorgement with prejudgment interest, and civil penalties.

"To increase transparency and guard against conflicts of interest, the federal securities laws require credit rating agencies to disclose how ratings are determined and to have effective internal controls to ensure they adhere to their ratings methodologies," said Daniel Michael, chief of the SEC Enforcement Division's Complex Financial Instruments Unit.  "In this action, the complaint alleges that Morningstar failed on both counts by permitting analysts to make undisclosed adjustments over which Morningstar had no effective internal controls."

Morningstar's Response

In a rebuke to the SEC lawsuit, Morningstar issued a press release on Feb. 17, saying that MCR "complied with the regulatory requirements in question" while the SEC's position is "inconsistent with its own rules and … policies" and that the agency has "overstepped its regulatory limitations by imposing requirements that would regulate the substance of credit rating methodologies."

In an accompanying position paper, Morningstar said that by questioning MCR's use of qualitative factors in its legacy CMBS ratings model, the SEC is "attempting to dictate the substance of MCR's rating methodology," which it is prohibited to do by law. "If the SEC believes additional rules are required — consistent with the analytical independence of a credit rating agency — the agency should go through the rule-making process, not file an action against MCR."

Morningstar noted its cooperation with the SEC's investigation, which dates back to February 2016, and its disappointment in the SEC for pursuing litigation.