Firm Settles SEC Charges for Misleading Marketing Communications on CMO Bonds

A broker-dealer/investment adviser settled SEC charges for misleading investors purchasing Collateralized Mortgage Obligation Bonds ("CMO Bonds").

According to the Order, the firm structured, offered and sold CMO Bonds based on misleading collateral information (i.e. the data provided by the firm inaccurately reflected the characteristics of the mortgages backing the bonds), thereby, creating a distorted impression of their value and performance.

The SEC determined that:

• on multiple occasions, firm representatives provided offering sheets containing misleading collateral information to customers, inflating metrics such as interest rates and prepayment speeds;
• senior desk members structured bonds to create more favorable appearances in third-party analytics systems, knowing that this data would influence customer purchasing decisions; and
• the firm's supervisory controls failed to identify or prevent these actions, allowing the misleading conduct to persist unchecked throughout the relevant period.

Additionally, the SEC found that internal warnings, highlighting concerns over the misleading collateral information, were ignored, and senior personnel failed to escalate these issues to compliance or senior management.

The SEC concluded that the firm's conduct violated SA Section 17(a)(3) ("Fraudulent Interstate Transactions") and that the firm failed to reasonably supervise its representatives, as required under SEA Section 15(b)(4)(E) ("Registration and regulation of brokers and dealers").

To settle the charges, the firm agreed to (i) a censure, (ii) a cease-and-desist order, (iii) pay $19,417,908 in disgorgement and $2,241,507 in prejudgment interest and (iv) pay a $19,000,000 civil penalty. The SEC noted that the firm has since implemented supervisory procedures, including pre-approval processes for structured products and improved monitoring of customer communications.