The Securities and Exchange Commission has levelled allegations of federal securities law-breaking by Standard & Poor’s, the ratings agency.

The charges pertain to fraudulent misconduct in S&P's ratings of certain commercial mortgage-backed securities. S&P agreed to pay more than $58 million to settle the SEC’s charges, plus an additional $19 million to settle parallel cases announced by the New York Attorney General’s office ($12 million) and the Massachusetts Attorney General’s office ($7 million).

An SEC bigwig said: “Investors rely on credit rating agencies to play it straight when rating complex securities like commercial mortgage-backed securities, but Standard & Poor’s elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors. These enforcement actions are our first ever against a major ratings firm.”

The SEC issued three orders instituting settled administrative proceedings against S&P. According to one order, S&P’s claimed publicly in 2011 that it was using one approach to rate six conduit fusion commercial mortgage-backed securities transactions and issue preliminary ratings on two more transactions when it actually used a different one. As part of this settlement, S&P agreed to take a one-year break from rating conduit fusion commercial mortgage-backed securities.

Another SEC order found that after being frozen out of the market for rating conduit fusion commercial mortgage-backed securities in late 2011, S&P sought to re-enter that market in mid-2012 by overhauling its ratings criteria. To illustrate the relative conservatism of its new criteria, S&P published a false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress. S&P’s research relied on flawed and inappropriate assumptions and was based on data that was decades removed from the severe losses of the Great Depression. According to the SEC’s order, S&P’s original author of the study expressed concerns that the firm’s commercial mortgage-backed securities group had turned the article into a “sales pitch” for the new criteria and that the removal of certain information from the article could lead to him “sit[ting] in front of [the] Department of Justice or the SEC.” The SEC’s order goes on to say that S&P was less than accurate in its description of its calculations. S&P managed to get away without admitting or denying the findings of this second order.

A third SEC order issued in this case involved internal controls failures in S&P’s surveillance of residential mortgage-backed securities ratings.

US regulators have spent years not knowing exactly what to do with the out-of-control ratings agencies as the US constitution protects free speech and the agencies' freedom to say what they like about stocks, country risk and other things has been lumped in with that very basic right. As they receive most of their money from the largest and most established corporate interests in America, this is likely to continue, as is their tendency to play down Western risk and play up business risk in the Oriental countries and the rest of the world. The absence of any large number of alternative ratings agencies that are not based in the US has been seen as a testament to the American government's diplomatic clout.