Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

A Member of the Law Professor Blogs Network

Sunday, September 5, 2010

SEC Charges NRSRO with Violation of 10% Rule

The SEC issued an administrative Order against LACE Financial Corporation, a registered Nationally Recognized Statistical Rating Agency (NRSRO), and Barron Putnam, its founder and majority owner during the relevant time period. The Order finds that LACE made misrepresentations in its application to become registered as an NRSRO and its accompanying request for an exemption from a conflict-of-interest provision.  Pursuant to the Order, LACE is censured and ordered to pay a $20,000 penalty, and LACE and Putnam are ordered to cease-and-desist from committing or causing any violations and any future violations of these provisions. LACE and Putnam consented to the issuance of the Order without admitting or denying the findings.

Exchange Act Rule 17g-5(c)(1) (the Ten Percent Rule) prohibits an NRSRO from issuing or maintaining a credit rating solicited by a person that, in the most recently ended fiscal year, provided the NRSRO with net revenue equaling or exceeding ten percent of the NRSRO’s total net revenue for the fiscal year. In its NRSRO application and request for an exemption from the Ten Percent Rule, LACE materially misstated the amount of revenue it received from its largest customer during 2007.  LACE also violated certain other provisions governing NRSROs by failing to disclose in its NRSRO application that it performed an extra layer of review when determining credit ratings for certain issuers whose securities made up the pools of asset-backed securities managed by LACE’s largest customer, failing to maintain written policies and procedures governing this extra layer of review, furnishing inaccurate audited financials to the Commission for 2008, failing to maintain all e-mails concerning its credit ratings, and permitting Putnam to participate in determining the credit rating for an entity whose stock he owned.

The SECalso issued an Order against LACE’s former president, Damyon Mouzon. In the Mouzon Order, the Division of Enforcement alleges that as LACE’s president, Mouzon was responsible for ensuring the accuracy of the information provided to the Commission in connection with LACE’s NRSRO application and its request for an exemption from the Ten Percent Rule, and that he knew or should have known that LACE’s representations regarding the amount of revenue received from its largest client during 2007 were inaccurate. The Division of Enforcement further alleges that Mouzon knew or should have known that LACE was required to disclose the extra layer of review performed for certain issuers in its NRSRO application and maintain written policies and procedures governing this extra layer of review, but failed to ensure that LACE did so. The Division of Enforcement also alleges that, as LACE’s president, Mouzon was responsible for managing the firm’s operations and knew or should have known that, as a registered NRSRO, LACE was required to retain all e-mails relating to its credit ratings, but failed to ensure that LACE did so.

The Division of Enforcement alleges that, as a result of this conduct, Mouzon was a cause of LACE’s securities violations.  A hearing in this matter will be scheduled before an Administrative Law Judge, who will hear evidence from the Division of Enforcement and Mouzon.

http://lawprofessors.typepad.com/securities/2010/09/sec-charges-nrsro-with-violation-of-10-rule.html

SEC Action | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef0133f3d1903f970b

Listed below are links to weblogs that reference SEC Charges NRSRO with Violation of 10% Rule:

Comments

Post a comment