SEC Said to Seek Standard & Poor’s Suspension of CMBS Rating

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The U.S. Securities & Exchange Commission is seeking to suspend Standard & Poor’s from grading commercial-mortgage bonds in what would be the agency’s toughest action yet against a major credit rater, a person with knowledge of the matter said.

S&P parent McGraw Hill Financial Inc. is still in talks over a possible settlement with the SEC, which has been investigating whether the firm bent rating criteria to win business in 2011, said the person, who asked not to be named because the talks aren’t public.

The credit-rating industry has come under greater scrutiny since it was blamed for fueling the 2008 financial crisis by giving top ratings to bonds that later soured. If the SEC suspends part of S&P’s business, it would be the first such action against a major credit-rating firm.

Catherine Mathis, a spokeswoman for McGraw Hill, declined to comment, as did John Nester, a spokesman for the SEC.

The possible suspension has been a focal point of the settlement talks, the person said. S&P has made efforts to avoid the sanction over concerns that the reputational consequences would harm its franchise, according to the person.

McGraw Hill fell as much as 4.3 percent before ending the day down 2 percent at $91.80. The stock has climbed 17.4 percent this year.

SEC Notice

The SEC sent S&P a Wells notice in July, saying that investigators were pursuing an enforcement action tied to six commercial mortgage-backed securities, or CMBS, ratings from 2011, according to a regulatory filing. The alleged violations relate to the CMBS rankings and “public disclosure made by S&P regarding those ratings thereafter,” McGraw Hill said.

S&P pulled assigned CMBS grades three years ago on an 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 because it was reviewing conflicts in how its methodology was being applied, the company said at the time.

The credit grader halted rating any new commercial-mortgage bonds, saying it had to review a potential discrepancy in its model. That August, the company said the conflict wasn’t significant and it would resume grading deals. S&P revised its criteria in 2012 and reentered the market after being frozen out for more than a year.

$60 Million

A week before receiving the SEC warning, S&P cut almost a third of its CMBS group and transferred department head Peter Eastham to a role in his native Australia, a person with knowledge of the move said at the time. McGraw Hill recorded a $60 million charge in the third quarter due to a possible settlement with the SEC and attorneys general of New York and Massachusetts.

By suspending S&P from one of the more profitable areas of the business, the SEC would seek to curb a practice known as ratings shopping, where bond issuers hire the companies willing to offer the best grades. The potential for an SEC action rippled across the industry. Shares of Moody’s Corp., the second-biggest ratings firm, fell as much as 2.1 percent before ending the day down 1.1 percent at $97.50.

U.S. Lawsuit

The ratings firm is separately facing a $5 billion lawsuit filed by the U.S. Justice Department in February 2013, alleging that S&P and its parent inflated ratings on bonds backed by home loans made to the riskiest borrowers to win business from Wall Street banks. S&P, along with Moody’s Investors Service and Fitch Ratings, were blamed for helping trigger a financial crisis that sent the world’s largest economy into its longest recession since 1933.

After the Justice Department filed the lawsuit, S&P said it would defend itself “vigorously” against the “meritless” claims.

Grading securities tied to debt on skyscrapers, hotels and shopping centers is one of the most lucrative businesses for ratings companies. The firms generally charge between $1.25 million and $2 million to grade a commercial-mortgage bond, which bundles the loans into securities of varying risk, according to an October 2011 Federal Reserve paper.

The SEC previously suspended a smaller ratings firm. In 2013, Egan-Jones Ratings Co. was barred from grading government debt and asset-backed securities for 18 months after settling charges it made material misstatements to the regulator.

(Updates with McGraw Hill share price in sixth paragraph.)
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