Risk & Compliance

DBRS Fined $6M Over Credit Rating Methodology

The SEC's case against DBRS is the second this year involving credit rating agencies' evaluations of complex financial instruments.
Matthew HellerOctober 26, 2015

The U.S. Securities and Exchange Commission on Monday charged credit rating agency DBRS with misrepresenting how it would monitor the ratings of residential mortgage-backed securities and other complex financial instruments.

DBRS agreed to pay nearly $6 million to settle the charges — the second settlement of an SEC enforcement action against a rating agency this year. In January, Standard & Poor’s paid $58 million over its evaluations of commercial mortgage-backed securities.

According to an SEC administrative order, DBRS did not have the staffing or technology to monitor each of its RMBS and re-securitized real estate mortgage investment conduit (Re-REMIC) ratings on a monthly basis as it claimed.

“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,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said in a news release. “Lack of resources is no excuse for failing to conduct surveillance promised in various SEC filings and other public documents.”

The case covers the period 2009 to 2011, before DBRS was sold to a consortium led by Carlyle Group and Warburg Pincus in March.

DBRS claimed in its 2009 Surveillance Methodology that it would monitor on a monthly basis each of its outstanding ratings of 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.

But for RMBS transactions, the SEC said, DBRS performed only the first step, reviewing monthly remittance or performance data to identify underperforming loan pools, on a monthly basis. “DBRS reviewed Re-REMIC transactions far less frequently due to their complexity and DBRS’s lack of surveillance resources necessary to analyze Re-REMIC performance,” the agency said.

The second and third steps of the quantitative analysis — deriving expected losses and running cash flow analyses — were conducted only when a surveillance rating committee would be convened, which was not monthly, according to the SEC.

The settlement includes disgorgement of $2.742 million in rating surveillance fees plus prejudgment interest of $147,482 and a penalty of $2.925 million.