The Securities and Exchange Commission announced Wednesday a $58 million settlement with storied ratings agency Standard & Poor’s Ratings Services, which the government accused of fraudulent activity involving commercial mortgage bonds.
Under terms of the settlement, S&P will pay $58 million in federal penalties, as well as $12 million to settle complaints with the New York Attorney General and $7 million with the Massachusetts Attorney General.
“These enforcement actions, our first-ever against a major ratings firm, reflect our commitment to aggressively policing the integrity and transparency of the credit ratings process,”Andrew J. Ceresney, director of the SEC’s enforcement division, said in a statement Wednesday.
At issue were ratings given by S&P to commercial mortgage-backed securities, which are pools of commercial mortgages that are bundled together and sold to investors as a mortgage bond. The SEC accused S&P of misrepresenting in public the methodology it actually used to derive its rating.
Ratings agencies such as S&P and Moody’s Investors Service have been under the regulatory microscope for their role in assisting Wall Street banks with favorable ratings for residential mortgage bonds that were given the gold-plated AAA rating, only to go bust, soaking investors and nearly sinking the U.S. financial system in 2008.
The 2010 revamp of financial regulation, called the Dodd-Frank Act, empowered the SEC to more closely police the ratings agencies. Wednesday’s announcement was the first major action in that regard that dealt with ratings given after the financial crisis.
“Investors rely on credit rating agencies like Standard & Poor’s to play it straight when rating complex securities like CMBS,” said Ceresney. “But Standard & Poor’s elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors.”