US judge restricts SEC lawsuit against Morningstar over undisclosed bond rating changes

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The seal of the United States Securities and Exchange Commission (SEC) is visible at their headquarters in Washington, DC, United States on May 12, 2021. REUTERS / Andrew Kelly

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NEW YORK, Jan.5 (Reuters) – A U.S. judge narrowed Wednesday but refused to dismiss a Securities and Exchange Commission lawsuit accusing Morningstar Inc (MORN.O) of letting analysts adjust the rating models of credit for approximately $ 30 billion in mortgage-backed securities, resulting in lower payments to investors.

U.S. District Judge Ronnie Abrams in Manhattan said the SEC plausibly claimed Morningstar Credit Ratings failed to provide users with a general understanding of its commercial mortgage-backed securities (CMBS) rating methodology and lacked effective internal controls over its rating process.

The judge also dismissed an SEC claim that Morningstar failed to identify the version of the methodologies used to determine individual credit ratings.

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Abrams also denied an SEC injunction request, noting that Morningstar Credit Ratings no longer operated as a credit rating agency after its operations were integrated with those of DBRS Inc, under the DBRS Morningstar brand.

Chicago-based Morningstar is also known for its investment research, especially for mutual funds, and asset management. Morningstar, its attorneys and the SEC did not immediately respond to requests for comment.

Rating agencies have been widely criticized by investors and politicians during and after the 2008 global financial crisis, following a US housing bubble fueled in part by inflated ratings for mortgage securities.

In a complaint filed last February, the SEC said Morningstar violated securities laws by allowing analysts to make undisclosed adjustments to the underlying ratings of “key constraints” for 30 CMBS transactions in 2015 and 2016.

The SEC said this sometimes benefits issuers who pay ratings by lowering interest rates owed to investors.

In May 2020, Morningstar agreed to pay $ 3.5 million to settle the SEC’s charges of violating conflict of interest rules designed to separate scoring work from sales and marketing.

The case is SEC v Morningstar Credit Ratings LLC, US District Court, Southern District of New York, No. 21-01359.

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Report by Jonathan Stempel in New York; Editing by Leslie Adler and Richard Chang

Our Standards: Thomson Reuters Trust Principles.


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