(Adds detail on other enforcement priorities at FINRA)
By Joseph A. Giannone
BALTIMORE, May 27 (Reuters) - Wall Street regulator FINRA is investigating the accuracy of disclosures surrounding subprime mortgage-backed security offerings, FINRA enforcement director James Shorris told a gathering of securities industry executives on Thursday.
The Financial Industry Regulatory Authority is taking a hard look at whether broker-dealers made “misstatements” or included “erroneous” information about their offerings, among other issues and practices.
Shorris, speaking on a panel during FINRA’s annual conference, did not elaborate during the session. FINRA declined further comment on the investigation.
MBS are pools of loans that are packaged into fairly conventional securities. As housing prices soared in 2006 and 2007, lenders underwrote increasingly risky loans.
The 2007 crash in housing prices and collapse of mortgage markets fueled hundreds of billions of dollars in losses for investors and banks worldwide holding MBS and collateralized debt obligations (CDOs) that were suddenly more risky than advertised and difficult to trade.
“Subprime” mortgages, which refer to loans made to people with poor credit, were only one of a long list of issues now under scrutiny by FINRA, Shorris told a standing-room-only audience.
FINRA continues to look for fraud in swaps transactions executed for municipalities and Regulation D private placements, a little-watched corner of the market. It is also examining auction-rate debt securities, billions of dollars of which remain frozen after more than two years.
He also stressed his concern about a number of complex investments that are, in short, poorly explained, little understood by brokers and sold to the wrong people. This category includes reverse convertibles, equity-indexed annuities and leveraged or inverted ETFs.
Shorris also called attention to a trend where unregistered and unregulated foreign firms lend cash for stock held by U.S investors, with the expectation of returning the shares in two years.
Instead these firms liquidate the stocks, leaving investors stuck with a big tax bill and a transaction that cannot be unwound. (Reporting by Joseph A. Giannone; Editing by Bernard Orr and Steve Orlofsky)