SEC Settles Misrepresentation Charges with Credit Rating Agency

Investing

Published: October 27, 2015 11:55 am

Last Updated: April 6, 2020 5:52 pm

The U.S. Securities and Exchange Commission (SEC) charged credit rating agency DBRS with misrepresenting its surveillance methodology for ratings of certain complex financial instruments during a three-year period. The firm settled and agreed to pay roughly $6 million for the charges.

The SEC investigation that followed an annual examination of DBRS by the agency’s Office of Credit Ratings found that the firm misrepresented that it would monitor on a monthly basis each of its outstanding ratings of U.S. residential mortgage-backed securities (RMBS) and re-securitized 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 found that DBRS did not conduct the analysis on a monthly basis, nor did it present each rating to the surveillance committee each month, and when the committee convened it reviewed only a limited subset of the outstanding RMBS and Re-REMIC ratings. The firm did not have adequate staffing and technological resources to conduct surveillance for each of its outstanding RMBS and Re-REMIC ratings monthly as stated in its surveillance methodology.

Without admitting or denying the SEC’s findings, DBRS agreed to disgorgement of $2.742 million in rating surveillance fees it collected between the years 2009 to 2011. Additionally, the firm will pay prejudgment interest of $147,482 and a penalty of $2.925 million. DBRS also agreed to be censured and retain an independent consultant to assess and improve its internal controls among other things.

Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said:

Rating agencies play a critical role in the capital markets and have an obligation to investors to comply with their published rating and surveillance methodologies. Lack of resources is no excuse for failing to conduct surveillance promised in various SEC filings and other public documents.

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