More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
J.P. Morgan Securities and Credit Suisse Securities (USA) on Friday agreed to pay more than $400 million combined to settle charges that they mislead investors in offerings of residential mortgage-backed securities.
The Securities and Exchange Commission, in coordination with the federal-state Residential Mortgage-Backed Securities Working Group had announced the charges on Friday. The SEC said it plans to distribute the money to harmed investors. Both firms agreed to settle without admitting or denying the charges.
The SEC alleges that J.P. Morgan misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter. J.P. Morgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans. The SEC says that "J.P. Morgan also is charged for Bear Stearns’ failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million."
J.P. Morgan has agreed to pay $296.9 million to settle the SEC’s charges.
According to the SEC’s order against Credit Suisse, the firm similarly failed to accurately disclose its practice of retaining cash for itself from the settlement of claims against mortgage loan originators for problems with loans that Credit Suisse had sold into RMBS trusts and no longer owned. Credit Suisse “also made misstatements in SEC filings about when it would repurchase mortgage loans from trusts if borrowers missed the first payment due. The firm made $55.7 million in profits and losses avoided from its bulk settlement practice, and its investors lost more than $10 million due to Credit Suisse’s practices concerning first payment defaults.”
Credit Suisse has agreed to pay $120 million to settle the SEC’s charges.
“In many ways, mortgage products such as RMBS were ground zero in the financial crisis,” said Robert Khuzami, director of the SEC’s Division of Enforcement, and co-chair of the RMBS Working Group, said in a statement. “Misrepresentations in connection with the creation and sale of mortgage securities contributed greatly to the tremendous losses suffered by investors once the U.S. housing market collapsed. Today’s actions involving RMBS securities are a continuation of the SEC’s strong efforts to pursue wrongdoing committed in connection with the financial crisis.”