WASHINGTON – At first, some lawyers on Friday questioned whether the Securities and Exchange Commission was overreaching in its enforcement case against an Oklahoma-based municipal advisory firm and two of its officials.
But a closer reading of the enforcement documents show that the commission focused on the fact that the firm and officials were hired to help the issuer with its continuing disclosure agreement and failed to do properly advise the issuer on changes made to that agreement, the lawyers concluded.
In the SEC case, announced on Thursday, Edmond, Okla. -based Municipal Finance Services, Inc., its founder and president Rick A. Smith, and vice president Jon G. Wolff, agreed to pay a total of $66,000 in penalties to settle charges that they violated their fiduciary duty to a city in connection with its continuing disclosure agreement.
The SEC said the firm and officials failed to properly alert a city of their concerns about a continuing disclosure agreement for some 2013 bonds that amended the date that annual audited financial statements and other financial information were due to 360 days after the end of the city’s fiscal year rather than 180 days that had been agreed to for three previous bond offerings in 2005, 2008 and 2012. The city was not identified.
The commission said the firm and officials did not follow up with others to resolve their concerns that the 2013 CDA, which was written by a now-retired bond counsel, amended the CDAs for previous bond issues. In addition, the SEC found the MA did not advise the city to submit the amended CDA to the Municipal Securities Rulemaking Board’s EMMA system until three years later, leaving holders of those earlier bonds in the dark about the change.
One lawyer said he expects the case will serve as a “template” for SEC enforcement action over the fiduciary duty standard, which the Dodd-Frank Act applied to municipal advisors beginning in July 2010.
“I think this action is full of information about the fiduciary duty,” the lawyer said. “It really raises a couple of interesting issues.”
“The conclusion is that municipal advisors are responsible for disclosure to investors through the back door of providing advice to their issuer clients,” he said, adding, “There are going to be people who are going to say they are very surprised, who are going to say, ‘We have no responsibility to investors.’”
The lawyer said the municipal market can expect even more "granular" SEC stances on fiduciary duty in enforcement cases involving MAs now that the Municipal Securities Rulemaking Board's Rule G-42 on the duties of non-solicitor municipal advisors has taken effect. That rule details how the standards MAs must meet in complying with their fiduciary duties.
But that lawyer and others then noted that the SEC’s cease and desist order makes clear that the city specifically hired the municipal advisory firm in 2011 to assist it in complying with its continuing disclosure agreements, as well as to prepare official statements for offerings and review and comment on all bond-related legal documents.
The SEC said in its order that Municipal Finance Securities “willfully breached its fiduciary duty” under the securities laws. Section 15B(c)(1) of the Securities Exchange Act of 1934, it said, “imposes upon municipal advisors and their associated persons a duty to their municipal entity clients, and prohibits them from engaging in any act, practice or course of business that is not consistent with that duty. Fiduciaries must act in the utmost good faith and use reasonable care to avoid misleading clients.”
The firm agreed to pay a $50,000 penalty and to establish written policies and procedures and periodic training regarding the fiduciary duties of MAs. Those policies and procedures must require the designation of an individual or officer for ensuring compliance.
The SEC said Smith and Wolff “caused the firm’s violation of the Securities Exchange Act and each agreed to pay $8,000 penalties.
This case is the third SEC enforcement action under the Dodd-Frank mandate of a fiduciary duty for MAs.
In June 2016, the SEC charged two California-based municipal advisory firms – School Business Consulting, Inc. (SBIC) and Keygent LLC – as well as some of their employees for violating their fiduciary duty by using deceptive practices in dealing with five school districts.
The SEC found that while SBIC was advising school districts about hiring financial professionals, it was simultaneously retained by Keygent, which was seeking MA business form the school districts.
The commission said also that SBIC’s president and sole employee Terrance Bradley provided confidential information about the hiring process of the school districts to Keygent, which may have led the school districts to hire Keygent as their MA.
SBIC was censured and fined a $30,000 while Bradley was barred from acting as a municipal advisor and agreed to pay $20,000. Keygent agreed to pay $100,000 and two of its managing directors, Anthony Hsieh and Chet Wang agreed to pay penalties of $30,000 and $20,000, respectively.
In its first such case, the SEC charged Kansas-based municipal advisory firm Central States Capital Markets, its chief executive officer, and two of its employees in March 2016 for breaching their fiduciary duties by failing to disclose a conflict of interest to an unnamed city that issue bonds.
According to the SEC, the MA firm, its CEO John Stepp, former vice president Mark Detter, and current vice president David Malone served as financial advisors for the city in a muni transaction, then selected a broker-dealer where the three men also worked to underwrite the bonds.
Central States agreed to settle the SEC's charges by paying $374,828, which included the disgorgement of $289,828 of ill-gotten gains and interest, as well as an $85,000 civil penalty.
Stepp agreed to a $17,500 civil penalty and a six-month suspension from acting in a supervisory capacity with any broker-dealer, investment advisor, or municipal advisor. Detter and Malone were to pay civil penalties of $25,000 and $20,000, respectively and faced a one-year minimum bar from the financial services industry.
