Risk & Compliance

Kroll Fined $2M for Violating Credit-Rating Rules

The SEC says Kroll failed to comply with rules for determining the ratings of commercial mortgage-backed securities and CLO Combo Notes.
Matthew HellerSeptember 30, 2020

Kroll Bond Rating Agency has agreed to pay $2 million to settle allegations that its procedures for rating derivative securities fell short of industry standards.

The U.S. Securities and Exchange Commission tightened its oversight of credit ratings agencies after the mass defaults of highly rated structured finance products in 2007 and 2008 led to a renewed focus on the quality of ratings.

According to the SEC, Kroll, a relative newcomer to the industry, violated post-crisis rules in determining the ratings of commercial mortgage-backed securities and collateralized loan obligation combination notes.

The settlement with Kroll, announced on Tuesday, came four months after the SEC fined Morningstar Credit Ratings for failing to comply with a conflict of interest rule.

“Ratings agencies play a crucial gatekeeping role in the securities market. With that responsibility comes the requirement that they establish and enforce policies and controls to ensure the consistency and integrity of credit ratings,” Daniel Michael, chief of the SEC enforcement division’s complex financial instruments unit, said in a news release.

As The Wall Street Journal reports, Kroll and Morningstar “have emerged in recent years as important players in rating asset-backed securities, which have boomed on Wall Street. In some segments of the market, the firms have engaged in a fierce battle over market share and amended their methodologies in issuer-friendly ways.”

The SEC faulted Kroll for allowing its CMBS analysts to use their “professional judgment” to make adjustments to the projected decline in revenue from properties in default while omitting “any analytical method for determining the applicability of, magnitude of, or recording the rationale for [the] adjustment.”

The commission also said Kroll failed to “establish, maintain, enforce and document policies and procedures reasonably designed to assess the probability” that an issuer of CLO Combo Notes “will default, fail to make timely payments, or otherwise not make payments to investors in accordance with the terms of the security.”

Kroll said it “stands behind the integrity of its ratings, methodologies and processes” and “will continue to provide timely and transparent, best in class ratings services and research to the market.”

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