Credit rating agency DBRS misrepresented its mortgage bond rating capabilities over a three-year period and will pay nearly $6 million to settle charges brought against it by the Securities and Exchange Commission, the SEC announced on Monday.
The SEC said Monday that it charged DBRS with misrepresenting its surveillance methodology for residential mortgage-backed securities and re-securitized real estate mortgage investment conduits.
According to the SEC, DBRS said that as part of its normal credit rating methodology, it conducts a “three-step quantitative analysis” and subjects each rating to review by a surveillance committee.
But an SEC investigation found that DBRS did not conduct the supposed quantitative analysis, nor did it present each rating to the surveillance committee each month.
In the course of its investigation, the SEC determined that when the surveillance committee convened, it reviewed only a “limited subset” of the outstanding RMBS and Re-REMIC ratings, instead of all of the ratings.
According to the SEC, DBRS 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, but Andrew Ceresney, the director of the SEC’s Division of Enforcement, said that not having adequate resources is not a valid reason for failing to fulfill DBRS’ stated methods.
"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,” Ceresney said. “Lack of resources is no excuse for failing to conduct surveillance promised in various SEC filings and other public documents.”
The SEC also said that its order instituting a settled administrative proceeding further found that DBRS did not disclose changes to certain surveillance assumptions as the firm’s methodology claimed it would.
According to the SEC, DBRS did not admit or deny the findings in the SEC’s order.
As part of the settlement, DBRS agreed to 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, for a total of $5.81 million.
DBRS also agreed to be censured and retain an independent consultant to assess and improve its internal controls among other things, the SEC said.
In a statement, DBRS said that the settlement is final and not subject to court approval. DBRS also said that it will name an independent consultant to audit certain ratings methodologies and models and review certain aspects of DBRS’s internal controls, staffing, documentation of rating activities, document retention policies and practices, and compliance program.
“DBRS is pleased to have concluded this matter,” the company said in statement. “The company takes its regulatory obligations very seriously and is committed to providing independent credit ratings opinions of the highest quality.”