Securities Enforcement: DBSR to Pay Almost $6M to Settle SEC Related to Ratings Methodology for RMBSs and Re-REMICs, FINRA Censures NFP Advisor Services for Inadequate Supervision of Private Securities Transactions

Credit Rater Accused of Misrepresenting Surveillance Approach for Complex Securities
Credit rating agency DBSR Inc. will pay nearly $6 million to settle Securities and Exchange Commission charges. The regulator is accusing the credit rater of misrepresenting the surveillance method it used for rating certain kinds of complex financial instruments over a three-year period.

In its yearly examination of DBSR, The agency’s Office of Credit Ratings found that the credit rating agency misrepresented that it would each month monitor its current ratings of re-securitized real estate mortgage investment conduits and residential mortgage-backed securities. DBSR said it did this via a three-step quantitative analysis and a surveillance committee review of each rating.

However, said the SEC, the firm failed to perform this monthly scrutiny and did not have its committee look at each rating every month. Instead, when the committee would get together it would only examine a limited subset of outstanding Re-REMIC and RMBS ratings. The credit rater lacked the sufficient technological resources and staffing for performing surveillance for all outstanding Re-REMIC ratings and RMBS each month. The SEC also said that DBRS failed to disclose modifications to specific surveillance assumptions even though its methodology said that is what it would do.

As part of the settlement, DBRS consented to disgorge over $2.7M in rating surveillance fees that it received from ’09 to ’11 in addition to prejudgment interest. It consented to paying a $2.925M penalty and will hire an independent consultant to look at its internal controls, make recommendations for how to improve them, and other matters.

NFP Advisor Services to Pay $500K to FINRA Over Inadequate Supervision
The Financial Industry Regulatory Authority has censured NFP Advisor Services for failing to properly supervise its registered representatives when they conducted private securities transactions. These representatives were registered not just with the firm but also with a registered investment advisor.

The self-regulatory organization said that during a FINRA probe, NFP Advisor discovered that one of its representatives was using his outside registered investment advisor to recommend alternative investments and manage accounts. The SRO said that these activities qualified as undisclosed business. It was only after that when the registered representative disclosed that he was managing an investment fund as an external business activity.

FINRA said that the firm failed to keep an eye on the representative’s external activities, did not properly look into red flags, and failed to follow up on his disclosure to ensure that he wasn’t conducting private securities transactions that violated NASD Rule 3040. Because of this, the firm did not notice what he was engaged in and failed to supervise his transactions.

The SRO also said that the firm did not properly supervise the advisory activities of 79 dually registered representatives. It also purportedly failed to preserve emails that were securities-related and were transmitted through email services that were unmonitored. FINRA said that NFP Advisor Services did not ensure that the email addresses were approved and overseen.

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Read the SEC Order in the DBRS Case (PDF)