On August 28, 2017, the Securities and Exchange Commission announced that Moody’s Investors Service Inc. has agreed to pay a total of $16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols. According to the SEC, this marks the first time the SEC has filed an enforcement action involving rating symbol deficiencies.
Moody’s agreed to pay $15 million to settle charges of internal controls failures involving models it used in rating U.S. residential mortgage-backed securities (“RMBS”) and will retain an independent consultant to assess and improve its internal controls. Moody’s separately agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols. Moody’s did not admit or deny the SEC’s charges.
According to the SEC’s order in the internal controls proceeding, Moody’s failed to establish and document an effective internal control structure as to models that Moody’s had outsourced from a corporate affiliate and used in rating RMBS from 2010 through 2013. Moreover, Moody’s failed to maintain and enforce existing internal controls that should have been applied to the models. Ultimately, Moody’s corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models. Also, in 54 instances, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings.
In the SEC’s order relating to ratings symbols, for 26 ratings of securities known as “combo notes” with a total notional value of about $2 billion, Moody’s assigned ratings to combo notes in a manner that was inconsistent with other types of securities that used the same rating symbols.