Credit rating agency DBRS Inc. will pay $6 million to settle charges by the Securities and Exchange Commission (SEC) that it misrepresented its surveillance methodology for ratings of certain complex financial instruments during a three-year period.
The firm was represented by Linda Thomsen of Davis Polk in Washington, D.C.
An SEC investigation that followed an annual examination of DBRS by the agency’s Office of Credit Ratings found that the firm misrepresented 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.
The firm 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.
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.
The SEC’s order instituting a settled administrative proceeding found that DBRS did not disclose changes to certain surveillance assumptions as the methodology stated that the firm would do.
“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,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Lack of resources is no excuse for failing to conduct surveillance promised in various SEC filings and other public documents.”
Without admitting or denying the findings in the SEC’s order, 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.
DBRS also agreed to be censured and retain an independent consultant to assess and improve its internal controls among other things.