The Financial Industry Regulatory Authority (FINRA) has announced that it has fined Credit Suisse Securities (USA) LLC $4.5 million, and Merrill Lynch $3 million for misrepresenting delinquency data and inadequate supervision in connection with the issuance of residential sub-prime mortgage securitizations (RMBS). Issuers of sub-prime 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. Historical delinquency rates are 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. As there are different standards for calculating delinquencies, issuers are required to disclose the specific method it used to calculate delinquencies.
FINRA found that in 2006, Credit Suisse misrepresented the historical delinquency rates for 21 sub-prime RMBS it underwrote and sold. Although Credit Suisse knew of these inaccuracies, it did not sufficiently investigate the delinquency errors, inform clients who invested in these securitizations of the specific reporting discrepancies or correct the information on the Web site where the information was displayed. Credit Suisse also failed to name or define the methodology used to calculate mortgage delinquencies in five other sub-prime securitizations. Additionally, Credit Suisse failed to establish an adequate system to supervise the maintenance and updating of relevant disclosure on its website.
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 a separate case, FINRA found that Merrill Lynch negligently misrepresented the historical delinquency rates for 61 sub-prime 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 Web site. Merrill Lynch also failed to establish a reasonable system to supervise and review its reporting of historical delinquency information. On Jan. 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.
"Firms must provide accurate information about the products they offer so that their customers can make informed investment decisions," said Brad Bennett, executive vice president and chief of enforcement for the Financial Industry Regulatory Authority (FINRA). "Credit Suisse and Merrill Lynch failed to monitor and supervise the reporting of historical delinquency rates, depriving investors of information essential to assessing the profitability of mortgage-backed investments."
In settling this matter, Credit Suisse and Merrill Lynch neither admitted nor denied the charges, but both broker-dealers consented to the entry of FINRA's findings.
