Moody's Corp. is a credit rating, research and risk analysis firm. (Photo: Scott Eells/Bloomberg)

In the first enforcement action of its kind, Moody's Investors Services Inc. has agreed to pay $16.25 million to settle charges that it failed to adopt adequate internal controls and to apply clear and consistent credit rating symbols.

It marked the first time the U.S. Securities and Exchange Commission has filed an enforcement action involving rating symbol deficiencies, according to a statement from the SEC. Moody's, part of New York-based Moody's Corp., is one of the nation's largest credit ratings agencies. It neither admitted nor denied the charges in Tuesday's orders.

A statement from Moody's on Wednesday said, “We are pleased to have resolved these legacy matters, which reach back to 2010. Moody's Investors Service regularly reviews and refines its policies and procedures and is committed to maintaining strong controls around models used in the rating process.”

The settlement involved two separate cease-and-desist orders. In the first, the company agreed to pay $15 million to settle claims that some credit ratings on securities, including U.S. residential mortgage-backed securities, “failed to establish, maintain, enforce, and document an effective internal control structure” with regard to its rating methodology.

The order said the SEC had “cautioned” Moody's in 2010 regarding its obligation to establish effective internal controls over the procedures and methodologies that it used to determine credit ratings.

But, according to the commission, Moody's failed to establish and document an effective internal control structure for models that Moody's had outsourced from a corporate affiliate and used in rating RMBS from 2010 through 2013. In addition, Moody's failed to enforce existing internal controls that should have been applied to the models.

Moody's had to correct more than 650 RMBS ratings with a notional value exceeding $49 billion, due in part to errors in the models, according to the SEC. Also, in 54 instances, Moody's failed to document its rationale for 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 a statement from Antonia Chion, associate director of the commission's Division of Enforcement. “As our order notes, the SEC put Moody's on notice about its internal controls obligations yet it did not develop an effective process to ensure the accuracy of the models.”

The order said Moody's agreed to hire an independent consultant acceptable to the SEC, who will review the company's internal controls and make recommendations within 180 days.

The company also must report on its compliance efforts and its implementation of the consultant's recommendations within 365 days from the order.

In the second order, the SEC said Moody's assigned ratings to combo notes—a type of structured finance vehicle backed by portfolios of corporate loans—that was inconsistent with other types of securities that used the same rating symbols.

The order said Moody's definition of credit risk did not adequately inform the users of its ratings about what the rating addressed. The unrated risk associated with a combo note, for example, was not limited to a discrete, noncredit feature, it said.

Moody's agreed to pay a $1.25 million penalty, to complete a comprehensive review of its internal controls related to credit ratings within 180 days, and to submit a written report documenting its compliance.