Blog: SEC charges S&P Global Ratings with rules violations – Financial Regulation News – Financial Regulation News

The Securities and Exchange Commission (SEC) has charged S&P Global Ratings with violating rules designed to prevent sales and marketing considerations from influencing credit ratings.

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The SEC involves an issuer that engaged S&P – a nationally recognized statistical rating organization (NRSROs) — to rate a jumbo residential mortgage-backed security transaction in July 2017. Over a five-day period in August 2017, S&P commercial employees — who manage the relationship with the issuer — attempted to pressure the S&P analytical employees – who evaluate and assign the rating – in this particular case. Specifically, the commercial employees want the analytical employees to rate the transaction consistent with preliminary feedback the analytical employees had given the customer, which included a calculation error.

While the communications went 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. 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, the SEC said.

“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,” Osman Nawaz, chief of the SEC’s Complex Financial Instruments Unit, said. “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. It also cooperated with the SEC’s investigation and took remedial steps to enhance its conflicts of interest policies and procedures.

Nonetheless, the order found that S&P violated certain rules that prohibit conflicts of interest at NRSROs, and 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. It also agreed to the entry of a cease-and-desist order, a censure, and compliance with certain undertakings.

The investigation was conducted by Jason Litow and Jennifer Brannan and supervised by Jeffrey Weiss and Yuri Zelinsky. James Connor of the Enforcement Division’s Trial Unit and staff of the SEC’s Office of Credit Ratings assisted with the investigation.

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