SEC to Begin Examining MAs

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WASHINGTON — The Securities and Exchange Commission's Office of Compliance Inspections and Examinations has launched a program to examine newly-regulated municipal advisors, the SEC announced Tuesday.

The SEC's MA registration rule, which took effect July 1, requires MAs to register with the commission during a four-month phase-in period ending Oct 31.

 OCIE plans to examine "a significant percentage" of non-dealer advisors that are not registered with the Financial Industry Regulatory Authority over the next two years, according to an SEC release. FINRA has authority to examine dealer MAs.  OCIE's exams may focus on MA compliance with fiduciary duties to state and local clients, books and recordkeeping obligations, disclosure, fair dealing, supervision, and employee qualifications and training, the SEC said.

"The municipal advisor examination initiative will focus on the areas that are most important to protecting issuers, investors, and municipal taxpayers," said Kevin Goodman, national associate director of OCIE's broker-dealer examination program. "We also will promote compliance by engaging these new municipal advisor registrants through outreach."

The SEC sent a letter Tuesday to executives and principals of registered MA firms informing them of the new exam program. The National Exam Program (NEP), will be operated out of the SEC's 11 regional offices and Washington, will engage in an outreach program with firms' senior management, according to the letter. The engagement phase of the program will be followed by an exam phase and an "informing policy" phase.

During the examination phase of the program, OCIE staff will check for MA compliance with both SEC rules and with final Municipal Securities Rulemaking Board rules, which are still under development. That will include whether the MA is properly registered with both the SEC and MSRB and whether it is living up to its fiduciary duty established by the Dodd-Frank Act.

A fiduciary must act in the best interest of its client without regard to its own financial or other interests, and must provide full and fair disclosure of material facts and conflicts of interest. The SEC letter explains that examiners could check for this by examining compliance with various MSRB rules, including the not yet finalized G-42 on the duties of non-solicitor MAs.

NEP intends to report its observations to the SEC during the final phase of the program. Those observations may include "common practices identified in high-risk focus areas, industry trends, and significant issues," according to the letter.

Regulators are taking a coordinated approach to MA oversight, the SEC said. OCIE will work in conjunction with the SEC's Office of Municipal Securities, and the SEC will work with FINRA and MSRB. SEC officials have said that while the SEC maintains highest-level oversight of muni advisors, FINRA will enforce rules for dealer-affiliated MAs and MSRB will continue to write rules governing them.

"The Office of Municipal Securities is committed to the protection of municipal issuers and investors," said SEC muni chief John Cross.  "We look forward to continuing to collaborate with OCIE to support this municipal advisor examination initiative and work closely with other market participants to ensure effective implementation of this important new regulatory regime for municipal advisors."

OCIE, FINRA, and the MSRB will hold a compliance outreach program for newly regulated municipal advisors later this year to inform the new MA registrants about the examination process and their obligations under Dodd-Frank, the SEC said.

Jessica Giroux, senior counsel and senior vice president for federal regulatory policy at Bond Dealers of America, said dealers are happy with the regulators' approach.

"We are encouraged that the SEC is planning a coordinated approach with the MSRB and FINRA with respect to oversight of municipal advisors and hope to learn more about the examination process through the SEC's Compliance Outreach Program when more details become available." she said.

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