Robert Benecke and firm Benecke Economics have been charged by the Securities and Exchange Commission for acting as an unregistered municipal advisor to three municipalities in New Jersey in a case that is emblematic of what many view as a growing problem nine years after final effectiveness of the municipal advisor registration rule.
For his role in providing advice on the structure, timing and terms of eight issuances, Benecke violated Exchange Act rule 15B, in addition to Municipal Securities Rulemaking Board Rules Rule A-12 on registration and G-17 on conduct, the SEC announced in a release Friday. Under the terms of the settled administrative action, Benecke is barred from the industry.
He is ordered to pay a civil penalty of $60,000, of which $15,000 will go to the MSRB, and the remaining $45,000 will go to Treasury.
The Commission's move against Benecke is emblematic of what both municipal advisor advocates and lawyers describe as an increasingly complex matter that the SEC has been attempting to get a handle on.
Benecke registered as a municipal advisor with the SEC in October 2014 and with the MSRB in December 2014. A year later, Benecke withdrew his MSRB registration and attempted to withdraw his SEC registration, "but failed to file the required withdrawal form, Form MA-W, due to a user error," the Commission said.
The SEC then issued an order canceling Benecke's registration in April 2019. The period in question spans from May 2019 to May 2022.
"In 2016 and 2017, he also represented to Commission staff that he was no longer engaging in municipal advisory activity," the Commission said. "In August 2018 and March 2019, the Commission staff provided notice to Benecke of the Commission's intent to cancel his municipal advisor registration because he has ceased doing business as a municipal advisor and because he had not made any required municipal advisor form submissions since January 2016."
In addition to providing advice on the structure, timing, and terms of the offerings, he also provided services such as preparing debt service and maturity schedules, coordinating the credit rating process, reviewing and revising official statements, and providing advice on disclosure.
SEC Section 15B, the regulation governing the conduct of municipal advisors states that "it shall be unlawful for a municipal advisor to provide advice to or behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, or to undertake a solicitation of a municipal entity or obligated person, unless the municipal advisor is registered in accordance with this subsection."
Implemented as part of Dodd-Frank reforms, confusion still seems to abound about where the line is drawn and whether an individual or firm might be covered by any of the several exemptions codified in the SEC's registration rule.
The Commission has come out with three different versions of guidance on 15B, the first two of which fixed some of the largest concerns, but the problem now is ambiguity.
"There was an original proposal that pretty much everyone thought was completely off target," one lawyer who requested not be named said. "And so the final version had a number of exemptions and exclusions and things which made the final rules more workable than originally proposed. But over time, they've created lots of questions around what is what and how do you comply and what's the practical way of doing it?"
Concrete guidance on how the Commission interprets the ambiguity has been limited and enforcement actions often focus on what some in the industry consider to be small, cherry-picked cases that can further complicate the matter. For instance, the SEC has gone after firms who've failed to list that one of their employees was on the board of a non-profit, classifying it as outside business activity, despite Financial Industry Regulatory Authority regulations that suggest enforcers aren't interested in those kinds of things.
Some lawyers familiar with the cases say it could also be a case of the Commission needing to hit certain enforcement quotas.
"There's always the metrics aspect, that 'oh we need to make sure we're able to say we found X number of violations and so let's go find the ones that create lots of results'," the lawyer said.
Another smaller area of concern that is beginning to creep in is the disconnect between certain rules, such as some MSRB rules that refer to municipal advisors and financial advisors somewhat interchangeably. For instance, MSRB Rule G-37 on pay to play defines a municipal securities business and one of the prongs includes financial advisory work.
MSRB Rule G-38 on solicitation of municipal securities business as well as Rule G-23 on the activities of financial advisors, contain similar references to financial advisors that have proved ambiguous.
"It's not even a question of what's the right or wrong answer," one lawyer said. "It's a question of, if someone comes to a rulebook and reads it, there's no way to navigate it in certain situations. It's a question of can someone provide some guidance here?"
Market participants agree that some guidance from regulators is needed but that too, could prove controversial.
"When you ask the regulator to do something, you never know for sure what the answer is going to be," one lawyer said. "Now for many people, it's a good thing to get the clarity, but for some people who have lived on one side of the line versus the other, it can change their business."
