Moody's has agreed to pay $16.25 million in penalties for failing to properly manage its credit ratings symbols, the SEC said Tuesday.
The SEC filed administrative charges against the credit rating agency over what it called "internal control failures and failing to clearly define and consistently apply credit rating symbols." It was the first time the SEC filed an enforcement action involving rating symbol deficiencies.
The failures involved symbols used by Moody's for residential mortgage-backed securities (RMBS) from 2010 to 2013, according to the SEC.
"Ultimately, Moody’s corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models," the SEC said. "Also, in 54 instances, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings."
For 26 ratings of securities known as “combo notes” with a total notional value of about $2 billion, Moody’s assigned ratings to combo notes differently than it did with other types of securities that used the same rating symbols, the SEC said.
“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. “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.”
Moody’s agreed to pay $15 million to settle charges of internal controls failures in its RMBS ratings and will retain an independent consultant to assess and improve its internal controls, the SEC said. Moody’s also agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols. Moody’s did not admit to or deny the SEC’s charges, the SEC said.