Morningstar to pay $3.5 million to settle SEC conflict of interest charges

By Chris Prentice

WASHINGTON (Reuters) – Morningstar Credit Ratings LLC has agreed to pay $3.5 million to settle U.S. Securities and Exchange Commission charges that it violated a conflict of interest rule, the agency said in a statement on Friday.

The charges relate to a conflict of interest rule designed separate credit ratings and analysis from sales and marketing, the statement said. Such enforcement actions against rating agencies have been rare, even as they have come under heightened criticism since the 2008 financial crisis over failures to follow ratings methodologies and to manage conflicts of interest.

Morningstar did not admit or deny the SEC’s charges and said in a statement that it had cooperated with the investigation and that there were no allegations any ratings issued were affected by the conduct,

The securities regulator said that credit rating analysts of the Morningstar Inc unit who were dedicated to asset-backed securities also engaged in sales and marketing to prospective clients from mid-2015 to September 2016. The SEC said it found that the New York-based firm failed to maintain written policies and procedures that sufficiently separated the business development from analytical activities.

“Morningstar sometimes enlisted its analysts in business development efforts, introducing the exact conflict of interest that the rule is intended to eliminate,” Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said in the agency’s statement.

In the wake of the financial crisis, Congress charged the SEC with overseeing the ratings agencies, whose inflated ratings of mortgage-backed securities helped fuel the U.S. housing bubble. The agency had struggled with the oversight due to insufficient resources and technology chances, Reuters previously reported.

(Reporting by Chris Prentice, Editing by Franklin Paul and Steve Orlofsky)