SEC Sends McGraw Hill Wells Notice Tied to CMBS Ratings

McGraw Hill Financial Inc. said it received a notice from the U.S. Securities and Exchange Commission that the regulator may seek an enforcement action tied to six commercial-mortgage backed securities that its Standard & Poor’s division graded in 2011.

S&P, the world’s largest credit grader, has been cooperating with the SEC, which sent the Wells notice on July 22, McGraw Hill said in a regulatory filing yesterday. The alleged violations relate to the CMBS rankings and “public disclosure made by S&P regarding those ratings thereafter.”

McGraw Hill’s market share for rating bonds backed by commercial mortgages has declined since the firm pulled assigned grades on a $1.5 billion offering in July 2011. New York-based S&P is cutting about a third of its staff in the division, a person with knowledge of the matter said last week.

Catherine Mathis, a spokeswoman for McGraw Hill, declined to comment beyond the regulatory filing. Florence Harmon, a spokeswoman for the SEC, also declined to comment.

The SEC may pursue actions including a cease-and-desist order, civil money penalties or a suspension or revocation of the firm’s ratings accreditation, according to the regulatory filing.

McGraw Hill Financial shares have climbed 6.3 percent this year to $83.11.

S&P rated six commercial-mortgage bond deals in 2011, according to a report from Morgan Stanley. They included three that pooled loans from borrowers across the U.S. and three tied to a single borrower, such as a $1 billion transaction linked to retail properties acquired by Blackstone Group LP.

Pulled Ratings

S&P pulled assigned grades three years ago on the offering from Goldman Sachs Group Inc. and Citigroup Inc., prompting the banks to abandon the deal after it was placed with investors. S&P yanked the rankings after discovering potential discrepancies in how its methodology was being applied, the company said at the time.

The credit grader then halted rating any new commercial-mortgage bonds, saying it had to review a potential problem in its model. That August, the company said the conflict had turned out not to be significant and it would resume grading deals.

The disruption kept S&P out of the commercial-mortgage backed securities market for more than a year before it revised its criteria in 2012.

McGraw Hill is also facing a U.S. Department of Justice lawsuit, filed in February 2013, which alleges that S&P inflated grades on residential-mortgage bonds to win business from Wall Street banks. The government is alleging the company deliberately understated the risk of securities backed by loans made to the riskiest borrowers.

S&P said it will defend itself “vigorously” against the Justice Department’s “meritless” claims.

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