WASHINGTON – Public pension and municipal advisors are among the examination priorities for the Securities and Exchange Commission in 2017, the SEC's Office of Compliance Inspections and Examinations announced Thursday.
OCIE, which characterizes itself as the "eyes and ears" of the SEC, said its priorities were derived from conversations office staff had with SEC commissioners, the Investor Advocate, and staff from the SEC's regional offices, policy-making divisions, its enforcement division, and other regulators. Its priorities are organized around three thematic areas: examining matters of importance to retail investors, focusing on risks specific to elderly and retiring investors; and assessing market-wide risks.
Public pension advisors merit examination because the pension plans of states, municipalities, and other government entities hold a large amount of U.S. investors' retirement assets, according to OCIE.
"We will examine investment advisors to these entities to assess how they are managing conflicts of interest and fulfilling their fiduciary duty," OCIE wrote in the letter. "We will also review other risks specific to these advisors, including pay-to-play and undisclosed gifts and entertainment practices."
The SEC's public finance abuse unit, which handles cases related to munis, brought two actions related to pension funds last year. The first involved Boston-based State Street Bank and Trust Co., the former head of the bank's public funds group, and a lawyer-lobbyist. The SEC alleged the three committed securities fraud by making illicit payments and campaign contributions to obtain millions of dollars of Ohio pension fund business.
State Street agreed to pay $12 million to settle the charges and Vincent DeBaggis, the former public funds group head, settled by paying a $100,000 penalty and disgorging $174,203 in ill-gotten gains. Robert Crowe, the alleged fundraiser and lobbyist for the bank during the illegal pay-to-play activity, is still challenging the SEC charges in court.
In the second pension fund case, announced in late December, the SEC alleged that Navnoor Kang, the director of fixed income for the New York State Common Retirement Fund, as well as brokers Deborah Kelley and Gregg Schonhorn, orchestrated a pay-to-play scheme to steer $2.5 billion of business to certain firms in exchange for gifts, vacations, cocaine, and prostitutes. Kang was additionally indicted on six criminal counts related to securities fraud, wire fraud, and obstruction of justice. Kelley is facing an indictment on five similar criminal counts.
OCIE's examinations of municipal advisors will be a continuation of duties it undertook following the Dodd-Frank Act's classification of MAs as regulated entities. OCIE said its 2017 MA initiative will be designed to evaluate MAs' compliance with SEC and Municipal Securities Rulemaking Board rules. It will also include industry outreach and education. Market participants have said a report summarizing key findings and trends OCIE staff has observed would be a welcome part of any outreach.
OCIE staff is responsible for examining non-dealer MAs while Financial Industry Regulatory Authority staff examines dealer MAs.
OCIE officials told National Association of Municipal Advisors members during the group's annual conference in October to expect more exams in 2017. The office's staff examined 50 non-dealer MAs and two broker-dealers in 2015. It closed 67 examinations of non-dealer MAs in 2016.
Market participants said they expect SEC enforcement actions against MAs to increase in 2017, adding those actions will help MAs avoid activities that may make them liable for similar enforcement action. MSRB rules that only took effect more recently, like G-42 on core duties of MAs, G-37 on political contributions, and G-20 on gifts will likely be the basis for more enforcement actions in 2017, participants have said.
FINRA, in its own letter about enforcement priorities for 2017, also said it would be paying attention to MAs, particularly whether firms are registering correctly with the SEC and MSRB as well as if firms that are not registered as MAs but are carrying out MA activities are properly within exclusions allowing such behavior.