Contact Us

SEC Sues Morningstar, Alleging Manipulation Of CMBS Ratings

The Washington, D.C., headquarters of the Securities and Exchange Commission

Morningstar has been hit with a lawsuit from the Securities and Exchange Commission over its rating of commercial mortgage-backed securities.

The lawsuit, filed Tuesday in a Manhattan federal court, alleges that Morningstar Credit Ratings analysts altered the company's risk assessment model for about $30B worth of CMBS loans in 2015 and 2016, Bloomberg reports. Analysts would lower the level of stress applied in tests that determined how much credit enhancement an issuer of a CMBS loan would require, at times to benefit issuers that paid MCR for those ratings.

DBRS Morningstar, which acquired DBRS and changed its name in 2019, told Bisnow in a statement that the rating methodology in question was last used on a CMBS loan in 2017 before being officially retired in 2018. It also claimed that the practice the SEC described was within legal bounds.

"In this case, the SEC overstepped its regulatory limitations by imposing requirements that would regulate the substance of credit rating methodologies," the statement read. "Morningstar prides itself on the integrity and independence of its research and analysis.

"The SEC alleges technical violations of the rules that formerly applied to MCR when it was a credit rating agency. In fact, MCR complied with the regulatory requirements in question; the SEC’s position in this case is inconsistent with its own rules and the SEC’s stated policies. The SEC does not allege that MCR improperly determined any credit rating or that there was any investor harm related to MCR’s use of its legacy methodology."

In general, 2015 and 2016 were years in which CMBS loans were given the most aggressive terms since the great financial crisis. New regulations put in place in 2016 required CMBS originators to retain a financial stake in the loans, making the market more conservative and creating what is popularly known as CMBS 2.0 loans. As hotel and retail properties struggle, the riskiest loans issued from that time are falling into delinquency and foreclosure at higher rates than CMBS 2.0 loans.

Though President Joe Biden's nominee to lead the SEC, Gary Gensler, has yet to be confirmed, the acting leadership of the agency has already sent a clear message that it will be more active in pursuing fraud and other investigations, The Wall Street Journal reports.