The Securities and Exchange Commission today charged S&P Global Ratings, a nationally recognized statistical rating organization (NRSRO) registered with the Commission, with violating conflict of interest rules designed to prevent sales and marketing considerations from influencing credit ratings.
The SEC’s order finds that an issuer engaged S&P to rate a jumbo residential mortgage backed security transaction in July 2017. Over a five-day period in August 2017, S&P commercial employees—employees responsible for managing the relationship with the issuer—on several occasions attempted to pressure the S&P analytical employees—employees responsible for evaluating and assigning the rating—to rate the transaction consistent with preliminary feedback the analytical employees had given the customer that turned out to include a calculation error. Despite sending the communications through the compliance department as required by S&P’s policies and procedures at that time, some emails sent by the S&P commercial employees to the S&P analytical team contained statements reflecting sales and marketing considerations. The order finds that, as a result of the content, urgent nature, high volume, and compressed timing of the communications, the S&P commercial employees became participants in the rating process during a time when they were influenced by sales and marketing considerations.
"NRSROs are prohibited from issuing or maintaining a credit rating where an individual who participates in sales and marketing activity seeks to influence the determination of the rating," said Osman Nawaz, Chief of the SEC’s Complex Financial Instruments Unit. "Credit rating agencies play a systemically important role in the structured products markets, and the federal securities laws require them to insulate their analytical functions from the influence of business considerations."
After discovering the circumstances surrounding the rating of the transaction, S&P self-reported the conduct at issue to the SEC, cooperated with the SEC’s investigation, and took remedial steps to enhance its conflicts of interest policies and procedures.
The order finds that, by issuing and maintaining these credit ratings, S&P violated certain rules promulgated under the Securities Exchange Act of 1934, which prohibit conflicts of interest at NRSROs, and also failed to establish, maintain, and enforce written policies and procedures designed to ensure compliance with those rules. Without admitting or denying the SEC’s findings, S&P agreed to settle this matter by paying a $2.5 million penalty and agreeing to the entry of a cease-and-desist order, a censure, and compliance with certain undertakings.
The SEC’s investigation was conducted by Jason Litow and Jennifer Brannan and was supervised by Jeffrey Weiss and Yuri B. Zelinsky. James Connor of the Enforcement Division’s Trial Unit and staff of the SEC’s Office of Credit Ratings assisted with the investigation.
Background: National securities exchanges (“exchanges”) that trade NMS stocks maintain pricing schedules that set forth the transaction pricing they apply to their broker-dealer members that execute orders on their trading platforms. As self-regulatory organizations under the Exchange Act, exchanges are subject to unique principles and processes that do not apply
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