More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Financial Industry Regulatory Authority said Thursday that it fined Northern Trust Securities $600,000 for “deficiencies in supervising sales of collateralized mortgage obligations (CMOs) and failure to have adequate systems in place to monitor certain high-volume securities trades,” the group said in a press release.
Last week, it fined Credit Suisse Securities (USA) LLC $4.5 million and Bank of America's Merrill Lynch $3 million for “misrepresenting delinquency data and inadequate supervision in connection with the issuance of residential subprime mortgage securitizations (RMBS).”
FINRA says that from October 2006 through October 2009, Northern Trust did not monitor customer accounts for potentially unsuitable levels of concentration in CMOs, “in large part because it used an exception reporting system that failed to capture or analyze substantial portions of the firm's business, including all CMO transactions, certain trades of 10,000 equity shares or more, and certain trades of 250 or more of fixed-income bonds,” according to the release.
FINRA also found that from January 2007 to June 2008, 43.5% of the firm's business was excluded from review. “The absence of systems to monitor equity trades of over 10,000 shares or fixed income trades of over 250 bonds also resulted in a failure to review these trades for suitability, concentration, excessive trading, excessive mark-ups or commissions, or for trading in restricted stocks,” the regulatory group stated.
"Northern Trust's deficient systems and procedures allowed more than 40% of its transactions to proceed without review, which in turn left vulnerable investors exposed to the risk of losing all or a substantial portion of their principal through potential over-concentration in CMOs," said Brad Bennett, FINRA executive vice president and chief of enforcement, in a statement.
In concluding this settlement, Northern Trust said that it neither admitted nor denied the charges but consented to the entry of FINRA's findings and agreed to pay a fine of $600,000.
“NTSI neither admits nor denies the findings of FINRA,” the Chicago-based company said in a statement. NTSI has addressed the systems and supervisory issues that were the subject of the settlement with FINRA. The settlement relates to activity from October 2006 through October 2009.NTSI is pleased to resolve this matter.
In the first quarter, Northern Trust’s corporate and institutional services group had some $4.4 trillion in assets under custody and $662 billion in assets under management.
Merrill, Credit Suisse
On May 26, FINRA fined Credit Suisse $4.5 million and Merrill Lynch $3 million over the misrepresentation of delinquency data and inadequate supervision in connection with the issuance of residential subprime mortgage securitizations (RMBS).
FINRA said that in 2006, Credit Suisse misrepresented the historical delinquency rates for 21 subprime RMBS it underwrote and sold. The group also says that “for six of the 21 securitizations, the delinquency errors were significant enough to affect an investor's assessment of subsequent securitizations, as it was referenced in four subsequent RMBS investments.”
In the Acceptance, Waiver and Consent (or AWC) Letter submitted by Credit Suisse, the investment bank says that on or around November 1, 2006, it was informed that one of its “master servicers” had provided erroneous information to a trustee in connection with the delinquency data for certain RMBS from January to September of 2006.
The master servicer, i.e., the originating bank, said it had found the cause of the errors but did not correct the errors in the static pool of information posted on the Regulation AB website. Furthermore, the master servicer and trustee “informed Credit Suisse that they believed the errors were immaterial and that they did not intend to provide investors with amended monthly reports.”
Of the 21 subprime securitizations for which inaccurate delinquency information had been reported, “the underreporting or overreporting of delinquencies for six securitizations may have affected an investor's assessment of subsequent securitizations,” Credit Suisse said in the letter. “Specifically, the inaccurate information for the six … securitizations described above was hyperlinked to four subsequent RMBS securitizations involving a combined total of $3,764,275,250 in notes issued and resulted in these four subsequent securitizations being sold with reference to inaccurate data.”
In a separate case, FINRA found that Merrill Lynch negligently misrepresented the historical delinquency rates for 61 subprime RMBS it underwrote and sold. However, in June 2007, after learning of the delinquency errors, Merrill Lynch promptly recalculated the information and posted the corrected historical delinquency rates on its website, according to the regulatory group.
Merrill Lynch also failed to establish a reasonable system to supervise and review its reporting of historical delinquency information, FINRA says. (On January 1, 2009, Merrill Lynch was acquired by Bank of America, but the firm continues to do brokerage business under its own individual broker-dealer registration.)
In eight instances, the delinquencies were significant enough to affect an investor's assessment of subsequent securitizations, as it was referenced in five subsequent RMBS investments.
“We are pleased to resolve this matter, which pre-dated Bank of America’s acquisition of Merrill Lynch. Merrill Lynch identified this problem and corrected it by September 2007,” Bank of America said in a statement.
In its communications with FINRA, Merrill said that on or about June 2007, it discovered that it had posted inaccurate information on its Reg AB website that both under- and overstated delinquencies.
“These errors in delinquency reporting had been caused by an incorrect data feed that populated information from the wrong column of the database that Merrill Lynch used to populate the Reg AR website after Merrill Lynch took this function in-house,” Merrill stated in its agreement letter. “These errors, which variously understated or overstated mortgage pool delinquencies, affected static pool information for 61 subprime securitizations posted on the Reg AB website from January 2006 through June 2007.”