BD Fined $6.5 Million for Over-Relying on Credit Ratings
A large broker-dealer agreed to pay a $6.5 Million fine for recommending asset-backed commercial paper based solely on the credit ratings. The SEC alleges that the firm, relying solely on the A1+/P1 ratings from Moody’s and S&P, recommended subprime mortgage-backed commercial paper to institutional investors including municipalities and non-profits. The PPMs for the facilities included significant risk disclosures about the subprime mortgage market, but the SEC alleges that the respondent did not require a review of the PPMs. Additionally, the respondent did not make the PPMs available to the investors. The respondent also agreed to disgorge its relatively small commissions ($65,000) from the transactions. The SEC charges that the firm’s failure to ensure reasonable basis suitability constituted an offering fraud under Sections 17(a)(2) of the Exchange Act.