More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The Financial Industry Regulatory Authority (FINRA) announced Tuesday that it had fined Citigroup Global Markets $3.5 million for providing inaccurate mortgage performance information, supervisory failures and other violations in connection with subprime residential mortgage-backed securitizations (RMBS).
“Citigroup posted data for its RMBS deals that it should have known was inaccurate, and even after they learned that the data was inaccurate, Citigroup did not correct the problem until years later,” said Brad Bennett, FINRA’s executive vice president and chief of enforcement, in a statement. “Investors use this data to inform their decisions and in this case, for over six years, investors potentially used faulty data to assess the value of the RMBS.”
In settling this matter, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Issuers of RMBS are required to disclose historical performance information for past securitizations that contain mortgage loans similar to those in the RMBS being offered to investors, according to FINRA. Historical data on mortgage performance is material to investors in assessing the value of RMBS and in determining whether future returns may be disrupted by mortgage holders’ failures to make loan payments.
According to Bennett, FINRA found that from January 2006 to October 2007, Citigroup posted inaccurate mortgage performance data on its website, where it remained until early May 2012, even though the firm lacked a reasonable basis to believe that this data was accurate. On multiple occasions, Citigroup was informed that the information posted was inaccurate yet failed to correct the data until May 2012. For three subprime or Alt-A securitizations, the firm provided inaccurate mortgage performance data that may have affected investors' assessment of subsequent RMBS.
In addition, Citigroup failed to supervise mortgage-backed securities pricing because it lacked procedures to verify the pricing of these securities and did not sufficiently document the steps taken to assess the reasonableness of traders’ prices, FINRA said.
Also, Citigroup failed to maintain required books and records, FINRA found. “In certain instances, when it re-priced mortgage-backed securities following a margin call, Citigroup failed to maintain a record of the original margin call, document the supervisory approval or demonstrate that the revised price was applied to the same position throughout the firm,” FINRA said.