Corporate & Securities Law

Securities regulators have asked several brokerage firms for information about the marketing and sale of mortgage-related products, specifically those sold to individual investors.  These collateralized mortgage obligations are pools of residential home mortgages.  Investors can receive income from the cash that flows from the underlying mortgage payments.  They can be risky investments, however, if the homeowner falls behind or cannot pay the mortgages.  The value of CMOs has suffered amid the increasing number of defaults in high-risk home mortgages.

The letters were sent to more than a dozen brokerage firms believed to be involved in the CMO market.  The letters, dated December 14th, asked for PowerPoint presentations, sales scripts and detailed customer-account information from June of '06 through July of '07.  The letter sent by FINRA, the Financial Industry Regulatory Authority, is looking into whether brokers sold these risky investments to individuals just as the market for related products was collapsing.  FINRA specifically asked for offering documents on products sold, created or distributed during the months of March and June of 2007.  The mortgage market had weakened since the previous fall and fell sharply over the spring and summer.

Regulators are probably also looking to see whether firms sold the products to investors without disclosing the risks, or to investors who didn't have the financial wherewithal to take on riskier investments. 

On the other side of the regulatory front, a spokesman for the SEC has said that the SEC's examination division plans to conduct its own sweep examination in coordination with FINRA.