NEW YORK (TheStreet) -- Shares of McGraw Hill Financial (MHFI) are falling after the company announced last night that it had received a Wells Notice from the SEC. McGraw Hill received the Wells Notice because the SEC's staff made a preliminary recommendation that the agency take an enforcement action against the company, McGraw Hill reported.
WHAT'S NEW: The SEC's Wells Notice alleges that the ratings of six commercial mortgage backed securities transactions in 2011 by McGraw Hill's S&P subsidiary violated federal securities laws. The staff may recommend that the agency hit McGraw Hill with a number of penalties, including a cease and desist order, civil money penalties, and a revocation or suspension of S&P's statistical rating organizations registration, the company reported. The registration is required by law to operate as a ratings agency.
ANALYST REACTION: In a note to investors earlier today, Peter Appert, an analyst at Piper Jaffray, wrote that the Wells Notice adds new regulatory and legal uncertainty for the company. However, the analyst notes that Moody's (MCO), another ratings agency, received a Wells Notice in March 2010, and no enforcement action was taken against the company. Although McGraw Hill could be fined because it used conflicting ratings criteria on mortgage securities in 2011, the issue has been resolved and is unlikely to have a significant impact on the company's ongoing operations, according to Appert. He continues to believe that the company's regulatory and legal risks are manageable, while its fundamentals are improving. As a result, he expects the stock to generate above average returns. As for Moody's, Appert does not expect its ratings on mortgage backed securities in 2011 to be investigated, as it did not change its ratings criteria for those securities in that year. Appert kept an $87 price target and Overweight rating on McGraw Hill Financial and an $80 price target and Overweight rating on Moody's.
PRICE ACTION: In early trading, McGraw Hill Financial fell 2.5% to $81.05, while Moody's was nearly unchanged at $91.52.