The Securities and Exchange Commission today announced that Moodys Investors Service Inc., one of the nations largest credit ratings agencies, has agreed to pay a total of $16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols.This marks the first time the SEC has filed an enforcement action involving rating symbol deficiencies.

Moodys agreed to pay $15 million to settle charges of internal controls failures involving models it used in rating U.S. residential mortgage-backed securities (RMBS) and will retain an independent consultant to assess and improve its internal controls.Moodys separately agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols.Moodys did not admit or deny the SECs charges.

According to the SECs order in the internal controls proceeding, Moodys failed to establish and document an effective internal control structure as to models that Moodys had outsourced from a corporate affiliate and used in rating RMBS from 2010 through 2013.Moreover, Moodys failed to maintain and enforce existing internal controls that should have been applied to the models.Ultimately, Moodys corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models.Also, in 54 instances, Moodys failed to document its rationalefor issuing final RMBS ratings that deviated materially from model-implied ratings.

Rating agencies play a critical role in our capital markets and need to have effective controls over their rating processes, said Antonia Chion, Associate Director of the SECs Division of Enforcement.As our order notes, the SEC put Moodys on notice about its internal controls obligations yet it did not develop an effective process to ensure the accuracy of the models it relied upon when rating residential mortgage-backed securities.

In the SECs order relating to rating symbols, for 26 ratings of securities known as combo notes with a total notional value of about $2 billion, Moodys assigned ratings to combo notes in a manner that was inconsistent with other types of securities that used the same rating symbols.

Investors expect and the law requires that symbols used by rating agencies be clearly defined and consistently applied, said Reid Muoio, Deputy Chief of the Enforcement Divisions Complex Financial Instruments Unit.Todays proceeding is the SECs first enforcing the Universal Ratings Symbol requirement and we will continue to pursue failures that render rating symbols unclear or inconsistent.

The internal controls case was investigated by Pei Chung, Greg Hillson, Jason Litow, and Pam Nolan and supervised by Deborah A. Tarasevich, Yuri B. Zelinsky, and Ms. Chion. Daniel Maher and Nicholas Margida of the Enforcement Divisions Trial Unit assisted with the investigation.The ratings symbols matter was investigated by Armita Cohen and Robert Leidenheimer and supervised by Mr. Muoio, of the Complex Financial Instruments Unit.Thomas Bednar of the Enforcement Divisions Trial Unit assisted with the investigation. Michael Bloise, Kristin Costello, Ilya Fradkin, Ken Godwin, Natasha Kaden, David Nicolardi, Warren Tong, David Bobillot,and Michele Wilham in the SECs Office of Credit Ratingsalso provided assistance.

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