The Financial Industry Regulatory Authority has hit Credit Suisse Securities LLC with a $4.5 million fine and Merrill Lynch with a $3 million fine for not properly representing data and supervising the residential subprime mortgage securitizations they sold.
The fines, which were announced by independent regulator FINRA on Thursday, were for improper handling that took place at the firms in 2006 and 2007. Each firm’s violation prevented certain investors from adequately understanding the nuances of residential subprime mortgage securities (RMBS), according to FINRA’s investigation.
RMBS are subject to certain disclosure rules when they are sold. Firms are required to provide investors with past delinquency rates for similar financial products. They are also required to tell investors how they calculated those delinquency rates.
Both Credit Suisse and Merrill Lynch failed to adequately follow those rules, according to FINRA.
“Firms must provide accurate information about the products they offer so that their customers can make informed investment decisions,” FINRA Executive Vice President and Chief of Enforcement Brad Bennett said in a statement. “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 2006, Credit Suisse did not accurately present historical delinquency rates for 21 RMBS it was selling. That erroneous information resulted from data issues at an undisclosed mortgage master servicer working with Credit Suisse.
For six of those 21 RMBS, it affected investors’ ability to fully understand the investments, FINRA said. The errors varied between overstating and understating the delinquencies. At the time that the mortgage master servicer told Credit Suisse about the problem, it also told the firm that it had already been corrected.
But Credit Suisse did not do enough to correct the situation, FINRA said. While Credit Suisse knew its information was inaccurate, the firm did not follow up by properly investigating the errors, informing clients and changing its website.
A Credit Suisse spokesman declined to comment for this story.
In 2007, Merrill Lynch also failed to present accurate historical delinquency rates for 61 subprime RMBS it was selling. The errors came from a technical error from a data feed, resulting in delinquency rates that were either overstated or understated. That affected investors’ ability to make decisions in eight securitizations, FINRA said.
“We are pleased to resolve this matter, which pre-dated Bank of America’s (2009) acquisition of Merrill Lynch,” Bank of America Spokesman Bill Halldin said in an e-mail statement. “Merrill Lynch identified this problem and corrected it by September 2007.”
It is not the first time that FINRA has brought fines against a firm for failing to properly represent delinquency rates tied to subprime securities.
Last July, FINRA tagged Deutsche Bank Securities with a $7.5 million penalty. That fine was related to erroneous information it provided in prospectuses for certain subprime residential mortgage backed securities, failing to correct data from third party vendors and servicers and not establishing a system to supervise its delinquency reporting, FINRA said.
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