Moody’s is to pay $15m to settle charges of internal controls failures involving models it used in rating US residential mortgage-backed securities (RMBS) and will retain an independent consultant to assess and improve its internal controls. Separately, the agency has also agreed to pay $1.25m and to review its policies, procedures, and internal controls regarding rating symbols. Moody’s did not admit or deny the SEC’s charges.

According to the SEC, Moody’s failed to establish and document an effective internal control structure for models it had outsourced from a corporate affiliate and used in rating RMBS between 2010 and 2013. The company also failed to maintain and enforce existing internal controls that should have been applied to the models.

As a result, the agency had to correct more than 650 RMBS ratings with a notional value exceeding $49bn. In addition, in 54 instances, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings.

In the case of 26 ratings of securities known as ‘combo notes’ with a total notional value of about $2bn, Moody’s assigned ratings in a manner that was inconsistent with other types of securities that used the same rating symbols. 

Reid Muoio, deputy chief of the enforcement division’s complex financial instruments unit, said: ‘Investors expect and the law requires that symbols used by rating agencies be clearly defined and consistently applied.

‘Today’s proceeding is the SEC’s first enforcing the universal ratings symbol requirement and we will continue to pursue failures that render rating symbols unclear or inconsistent.’

Report by Pat Sweet