Kroll Bond Rating Agency came to the bond-rating world with fresh eyes after the 2007-’08 global financial crisis.
On Tuesday, it agreed to pay more than $2 million to the U.S. Securities and Exchange Commission to settle claims that it relied on lax internal controls when assigning its credit ratings to bonds backed by commercial property debt and hybrid corporate debt securities, all in the postcrisis era.
The fine might not seem like a lot, and it’s certainly only a fraction of the billions extracted by the SEC and other financial regulators from big banks and credit-ratings firms in the aftermath of the 2008 crash.
But the securities at the heart of Tuesday’s SEC settlement also come from the same family of exotic assets that played a prominent role in the last decade’s financial crisis, but with the new twist of being put to the test by the deadly global coronavirus pandemic.
Specifically, the SEC claimed that Kroll “permitted analysts to make adjustments” on commercial mortgage-backed securities (CMBS) deals “based on their professional judgment,” while “omitting any” rationale for those changes, when awarding top AAA ratings to bond deals between 2012 and 2017.
Kroll said it “stands behind the integrity of its ratings, methodologies and processes, and neither admits nor denies the findings in the Commission’s Orders,” in a statement to MarketWatch. “KBRA will continue to provide timely and transparent, best in class ratings services and research to the market.”
Why does this matter? Congress passed the Dodd Frank Act of 2010, in part, to better shield investors from the sort of mass defaults and downgrades that shocked markets more than a decade ago, after highly rated mortgage securities failed to live up to their credit ratings when the U.S.