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The SEC is settling with bond rating firm S&P

Standard & Poor’s has agreed take a one year timeout from rating bond deals in a specialized piece of the commercial real estate market as part of a settlement with the Securities and Exchange Commission that covers the firms activities between 2011 and 2014. The firm, which is a subsidiary of McGraw Hill Financial, also agreed to pay the SEC $58 million and the Attorneys General of New York and Massachusetts $19 million to settle claims.

While S&P and other ratings agencies were sharply criticized by investors, legislators and regulators for their poor assessment of credit risks in real estate securities leading up to the collapse of the U.S. housing market, Wednesday’s settlement only covers activities in the years after the crisis.

The pact reached with the SEC covers S&P’s ratings of six U.S. conduit fusion commercial mortgage-backed securities deals that the firm rated in 2011 and two other deals in that period that became the focus of a Wells Notice issues by the SEC in July 2014. Conduit fusion CMBS is a type of mortgage-backed security backed by a pool of commercial real estate loans.

The SEC alleged that when rating the CMBS deals, S&P publicly disclosed a methodology that differed significantly from the approach the firm used. Those differing methodologies caused S&P to overstate the resilience of the bonds to a housing market downturn, the SEC alleges, and under-represented the the levels of credit enhancement the bonds might need.

It was only in July 2011 when Goldman Sachs Group Goldman Sachs Group and Citigroup Citigroup came to market with a deal called GS Mortgage Securities Trust 2011-GC4 that an apparent conflict emerged. When S&P put out its preliminary analysis of the deal, investors questioned the low levels of credit enhancement needed for the bonds, causing the bond ratings firm to review its practices. Ultimately, S&P withdrew its preliminary ratings on the deal, which ultimately didn’t close.

As part of this settlement, S&P agreed to take a “one-year timeout” from rating conduit fusion CMBS deals, the SEC said.

Furthermore, after being frozen out of the conduit fusion CMBS market in the wake of the failed Goldman and Citi deal, the SEC alleged that S&P published false and misleading information when illustrating its revised ratings methodologies to investors. While S&P said its proposed credit enhancement levels could withstand “Great Depression-era levels of economic stress,” the SEC alleged it used data that was decades removed from the stress of the Great Depression.

According to the settlement, the original author of the report expressed concerns that it had turned into a “sales pitch” for the new ratings criteria and that the narrow picture of information provided could lead to him “sit[ting] in front of [the] Department of Justice or the SEC.”