Targeted Examination Request

December 2007

Re: Collateralized Mortgage Obligations

 

FINRA is conducting an inquiry regarding sales of principal only ("PO"), interest only ("IO"), and inverse floater ("IF") tranches of collateralized mortgage obligations ("CMOs"). In connection with our inquiry, and pursuant to NASD Rule 8210, please provide the following documents and information:

 

  1. An Excel spreadsheet in electronic format containing the following information about customer transactions in IO tranche CMOs by your firm during the review period. All cancellations and rebills should be included in your spreadsheet. Your response should include the following columns:
    1. Account Name (if individual: last name, first name);
    2. Customer Account Number;
    3. Date of the transaction;
    4. Contra-Party
    5. Purchase or sale transactions;
    6. CUSIP number of IO tranche CMO;
    7. Number of Units purchased or sold;
    8. Price per unit;
    9. Principal amount of the transactions;
    10. Net amount of the transaction; and,
    11. Registered representative identification number;

  2. An Excel spreadsheet in electronic format containing the following information about customer transactions in IF tranche CMOs by your firm during the review period. All cancellations and rebills should be included in your spreadsheet. Your response should include the following columns:
    1. Account Name (if individual: last name, first name);
    2. Customer Account Number;
    3. Date of the transaction;
    4. Purchase or sale transactions;
    5. Contra-Party;
    6. CUSIP number of IF tranche CMO;
    7. Number of Units purchased or sold;
    8. Price per unit;
    9. Principal amount of the transactions;
    10. Net amount of the transaction; and,
    11. Registered representative identification number;

  3. An Excel spreadsheet in electronic format containing the following information about customer transactions in PO tranche CMOs by your firm during the review period. All cancellations and rebills should be included in your spreadsheet. Your response should include the following columns:
    1. Account Name (if individual: last name, first name);
    2. Customer Account Number;
    3. Age of customer;
    4. Date of the transaction;
    5. Purchase or sale transactions;
    6. CUSIP number of PO tranche CMO;
    7. Number of Units purchased or sold;
    8. Price per unit;
    9. Principal amount of the transactions;
    10. Net amount of the transaction; and,
    11. Registered representative identification number;

  4. Documents including Bloomberg Reports or printouts which provide a description, rating information and tranche information for each type of IO, PO or IF purchased by the customers identified in Items 1, 2 and 3;

  5. A listing of all firm exception reports used by the firm during the review period that refer to, relate to, or concern PO, IF, or IO tranche CMOs. At a minimum, provide the title of the report, its purpose, a description of the information available on the report, the frequency that the report was produced (e.g. monthly, daily, etc.). If no exception reports are utilized, provide a written description of how the firm monitors transactions in PO, IF or IO tranche CMOs.

  6. Copies of all customer complaints and arbitration / litigation claims relating to, referring to, or concerning IO, IF or PO tranche CMOs received during the review period. Please also provide a copy of the firm's response;

  7. All Written Supervisory Procedures addressing the suitability review process for IO, IF and PO tranche CMOs. If not included within the procedures, provide a written description of the documents reviewed, the names of individuals responsible for the review, the reviewer's title and departments, and a description of the basis upon which the final suitability determination is made;

  8. Copies of registered representative holding pages for the 5 registered representatives who generated the largest amount of commissions in IO, IF or PO tranche CMOs during the review period. Only include holding pages of customers who had transactions in IO, IF or PO tranche CMOs;

  9. Copies of all presentation materials, marketing materials, scripts, Powerpoint presentations, advertising and sales literature concerning or referring to CMO's IO's, PO's or IF's that were intended for or provided to customers;

  10. Copies of all presentation material, marketing material and training material concerning or referring to CMO's, IO's, PO's or IF's that were provided to registered representatives of the firm;

  11. Copies of each type of customer communication, not provided in response to item 9, that disclosed or discussed the risks associated with CMO's, IO's, PO's or IF's;

  12. Copies of all daily CMO offering sheets or similar documents, used to indicate CMO's that your firm had available for sale, that were created, used or distributed during the month of March 2007 and the month of June 2007;

  13. Copies of all policies and procedures related to the use of margin for CMO transactions. Provide a copy of the firm's margin agreement;

  14. Provide a description of how IO's, PO's and IF's were priced day to day and monthly for account statement purposes; and,

  15. Copies of all margin calls during the review period related to customer positions in IO, PO or IF tranche CMO's.