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.
DBRS lacked adequate staffing and technological resources to conduct the monthly surveillance for each of its outstanding RMBS and Re-REMIC ratings that its methodology claimed. In addition, the firm failed to disclose changes to surveillance assumptions, which the methodology stated that the firm would do.
Without admitting or denying the SEC’s findings, DBRS agreed to settle the charges by paying disgorgement of $2.742 million in rating surveillance fees it collected from 2009 to 2011, plus prejudgment interest of $147,482 and a penalty of $2.925 million. The firm also agreed to be censured, to retain an independent consultant to assess and improve its internal controls and to take additional measures. Developer and Landowner, Former Execs Charged in Accounting Failures
The SEC has charged the St. Joe Co., a Watersound, Florida-based real estate developer and landowner, its former top executives and two former accounting department directors, with improperly accounting for the declining value of its residential real estate developments during the financial crisis. The accounting failures resulted in the firm materially overstating earnings and assets in 2009 and 2010 in its reports.
According to the agency, St. Joe’s actions occurred through William Britton Greene, its former CEO; William McCalmont, former chief financial officer; Janna Connolly, former chief accounting officer; and J. Brian Salter and Phillip Jones, former directors of accounting.
The firm repeatedly failed to properly apply generally accepted accounting principles in testing its real estate developments for impairment. As a result, it failed to take required write-downs on properties hit hard by the financial crisis.
The agency found that Greene, McCalmont and Connolly used an unreasonably high property valuation in the company’s impairment testing of its largest real estate development, and Greene and McCalmont failed to disclose material changes in business strategy for two of St. Joe’s largest residential real estate developments.
During the period of misconduct, Greene, McCalmont, Connolly, and Salter kept quiet to company auditors about how the company conducted its impairment testing. In addition, St. Joe’s books-and-records failures during 2009 and 2010 put up roadblocks during the SEC’s investigation that resulted in delays and extra work.
In settling the charges, St. Joe, Greene, McCalmont, Connolly, Salter and Jones neither admitted nor denied them. However, St. Joe agreed to pay a $2.75 million civil penalty, and Greene agreed to pay a $120,000 penalty and disgorge ill-gotten gains of $400,000 plus prejudgment interest.
McCalmont agreed to pay a $120,000 penalty and disgorge $180,000 plus prejudgment interest. Connolly agreed to pay a $70,000 penalty and disgorge $60,000 plus prejudgment interest, and Salter agreed to pay a $25,000 penalty.
McCalmont, Connolly, Salter and Jones each also agreed to be suspended from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after two years (in the case of McCalmont and Jones), and after three years (in the case of Connolly and Salter).
— Check out Sen. Warren Slams Annuity Providers, Sellers for ‘Conflicts of Interest’ on ThinkAdvisor.