On June 30, the U.S. Securities and Exchange Commission (SEC) posted several new Notices of Covered Action. One Notice refers to a case where the SEC and Morningstar Credit Ratings (Morningstar) settled charges that Morningstar violated conflict of interest rules. Morningstar agreed to pay $3.5 million to settle the charges. The Notice serves as an announcement to individuals, who may have alerted the government to the violations in this case, to file a whistleblower award claim. Through the SEC Whistleblower Program, individuals who voluntarily provide the SEC with original information that leads to the successful enforcement action are eligible for a monetary award. SEC whistleblowers can earn awards that may range from 10-30% of the $3.5 million settlement.
The SEC’s charges allege that Morningstar violated conflict of interest rules meant to keep credit ratings and analysis separate from sales and marketing. According to the SEC, from mid-2015 through September 2016, Morningstar enlisted credit rating analysts in its asset-backed-securities group to aid in sales and marketing efforts. The SEC alleges that Morningstar’s head of business development directed analysts to identify potential business opportunities and to pursue those businesses “through marketing calls, meetings, and offers to provide indicative ratings.” The SEC found these practices violated Exchange Act Rule 17g-5(c)(8)(i), which prohibits agencies from issuing credit ratings in which analysts who aided in determining or monitoring the rating also participated in marketing or sales activity. Additionally, the SEC found Morningstar violated Section 15E(h)(1) of the Securities Exchange Act of 1934, which requires credit rating agencies to maintain written policies and procedures designed to sufficiently separate analysis from business development. In settling the charges, Morningstar neither confirmed nor denied the SEC’s findings.
The SEC Whistleblower Program is an essential tool in fighting corporate fraud and enforcing SEC rules and regulations. The program provides anonymity and anti-retaliation protections to whistleblowers. The program also seeks to induce and reward whistleblowing through monetary awards granted to whistleblowers.
Read the SEC’s press release on the case:
SEC Orders Credit Rating Agency to Pay $3.5 Million for Conflicts of Interest Violations