Morningstar to Pay $3.5 Million SEC Conflict of Interest Penalty

Analysts conducted both sales and ratings operations, the US securities regulator said.

Morningstar Credit Ratings was charged $3.5 million by the US Securities and Exchange Commission (SEC) after allegedly instructing its analysts to conduct both marketing and ratings functions at the company simultaneously.  

That’s a conflict of interest, according to the US securities regulator. The SEC said that Morningstar had its analysts reach out to potential business clients with the intention to provide indicative ratings between 2015 and 2016.

In one episode, an analyst allegedly authored a commentary for a business target, who then eventually signed up for the agency’s services.

“The SEC’s order finds that Morningstar violated [a rule] which prohibits a rating agency from issuing or maintaining a credit rating where an analyst who participates in determining or monitoring credit ratings also participates in sales and marketing activity,” the SEC said in a statement.

The agency also stated that Morningstar had not written or established rules prohibiting its employees from following the rules in question, which is also a violation of the SEC’s policies.

The SEC also alleges that the agency’s business development director instructed its employees to solicit potential clients at industry conferences, repeatedly follow up with those clients, and encourage potential clients to attend marketing meetings with the company.

Morningstar did not confirm or deny the allegations surrounding the violations in question, but agreed to pay the $3.5 million penalty and work to establish training procedures and other efforts to curb behavior that would violate conflict of interest rules in the future.

“Credit rating agencies must be vigilant to prevent potential conflicts of interest between their ratings functions and their sales and marketing activities,” said Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit Daniel Michael.

“As the SEC’s order finds, Morningstar sometimes enlisted its analysts in business development efforts, introducing the exact conflict of interest that the rule is intended to eliminate,” Michael added. 

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