insight
SEC Sanctions S&P
January 21, 2015
Standard and Poor’s Settles Ratings Methodology and Practices Misconduct Charges with the SEC
The Securities and Exchange Commission today announced that they had settled with Standard and Poor’s (S&P) on charges of fraudulent misconduct in rating commercial mortgaged backed securities (CMBS) post credit crisis. According to the settlement, S&P will not be rating multi-loan (conduit) CMBS transactions until January 21, 2016, due to applying different methodologies to issue preliminary ratings and surveillance of these transactions back in 2011. However, S&P, will continue to rate all other type of CMBS transactions and will continue to monitor and maintain rating on previously rated CMBS transactions.
S&P will pay $58 million to the SEC in fines for their misconduct and an additional $19 million to settle with the Attorney General’s offices of New York and Massachusetts. They also agreed to retract a “misleading” study they had published supporting their methodologies based on flawed and inappropriate assumptions. The SEC claimed that the study did not completely describe certain aspects of the criteria in the study.
We believe the restriction on S&P from rating any future conduit CMBS transactions will have minimal impact on the CMBS market as S&P’s rated only 3 out of 40 or 9% of the market in 2014. The SEC’s action of banning S&P also supports our CMBS outlook that conduit CMBS underwriting has been and continues to be of average quality. We continue to monitor and remain cognizant of the risks in the current CMBS market. AAM continues to prefer single asset transactions with lower leverage relative to conduit transactions.
Mohammed Ahmed
Structured Products Analyst
Disclaimer: Asset Allocation & Management Company, LLC (AAM) is an investment adviser registered with the Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. Registration does not imply a certain level of skill or training. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. This report has been prepared for informational purposes only and does not purport to represent a complete analysis of any security, company or industry discussed. Any opinions and/or recommendations expressed are subject to change without notice and should be considered only as part of a diversified portfolio. Any opinions and statements contained herein of financial market trends based on market conditions constitute our judgment. This material may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different than that discussed here. The information presented, including any statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Although the assumptions underlying the forward-looking statements that may be contained herein are believed to be reasonable they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. AAM assumes no duty to provide updates to any analysis contained herein. A complete list of investment recommendations made during the past year is available upon request. Past performance is not an indication of future returns. This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.