The Securities and Exchange Commission charged a credit rating agency with misrepresenting its surveillance technology and also charged former top executives of a real estate developer and landowner with accounting failures.
In addition, the Financial Industry Regulatory Authority censured and fined NFP Advisor Services for supervisory failures surrounding private securities transactions.
FINRA: NFP Advisor Services Failed to Supervise Dually Registered Reps
FINRA censured NFP Advisor Services and fined the firm $500,000 after it found that NFP failed to supervise private securities transactions of registered representatives who were dually registered with the firm and a registered investment advisor.
According to the agency, the firm learned during a FINRA examination that one of its reps was recommending “managed accounts” and “alternative investments” through his outside RIA, which was an undisclosed business. After that, the registered representative told the firm that he was managing an investment fund as an outside business activity.
The firm did not track his outside activities, adequately investigate red flags or follow up on the disclosure to make sure he was not conducting private securities transactions in violation of NASD Rule 3040. As a result, the firm failed to discover what he was doing or to supervise his transactions.
The firm also failed to supervise the advisory activity of 79 reps who were dually registered with the firm and 14 RIAs. These RIAs had more than $3 billion in assets under management, a portion of which was under the management of the 79 reps.
Other failures included not preserving securities-related emails reps had sent through unmonitored email addresses, and not making sure that those addresses had been approved and monitored, even though the firm had corresponded with the representatives through those email addresses. In addition, the firm didn’t even know about three separate websites maintained by one of its representatives, much less approve the advertising and other content the sites contained.
Credit Rating Agency Charged by SEC on Surveillance Tech Failures
Credit rating agency DBRS Inc. was charged by the SEC with misrepresenting its surveillance methodology for the ratings it gave to some complex financial instruments during a three-year period.
According to the agency, an annual examination of the credit rater by the SEC’s Office of Credit Ratings found that while the firm claimed it would monitor on a monthly basis each of its outstanding ratings of U.S. residential mortgage-backed securities (RMBS) and resecuritized real estate mortgage investment conduits (Re-REMICs), by conducting a three-step quantitative analysis and subjecting each rating to review by a surveillance committee, it did not do so.
Not only did the firm not conduct the analysis on a monthly basis, it also failed to present each rating to the surveillance committee each month. As a result, when the committee convened, it reviewed only a limited subset of the outstanding RMBS and Re-REMIC ratings.