WASHINGTON – Securities and Exchange Commission examiners found widespread noncompliance by municipal advisors in exams conducted over two years leading them to send some firms’ names to the SEC’s enforcement division for follow-up.
The commission’s Office of Compliance Inspections and Examinations (OCIE) staff detailed their findings, which mostly found deficiencies with registration, books and records and supervisory requirements, in a recently issued Risk Alert. The alert urged MAs to review and make improvements in their practices, policies and procedures.
Asked about the Risk Alert, Susan Gaffney, executive director of the National Association of Municipal Advisors, said, “We appreciate this first report on cumulative exam findings and OCIE’s overall outreach efforts. The report should be a must read for MAs.”
Gaffney added: “We will further study the issues flagged by OCIE and [Financial Industry Regulatory Authority] and continue our efforts to educate MAs on the importance of complying with MSRB Rulemaking.”
One market participant who did not want to be identified said the instances of noncompliance are not too surprising since non-dealer MAs, unlike dealers, aren’t used to these kinds of requirements.
Non-dealer MAs were unregulated until enactment of the Dodd-Frank Act, which put all MAs under a federal regulatory scheme and subjected them to a fiduciary duty that requires them to put their clients’ best interests first before their own or anyone else’s.
The SEC adopted an interim temporary registration process under which MAs had to register with it by Oct. 1, 2010. Under final commission rules, MAs had to register with the SEC by July 1, 2014. MAs also had to register with the Municipal Securities Rulemaking Board and comply with its rules. The MSRB has amended its rules and adopted new ones to establish requirements for MAs.
OCIE staff said they conducted more than 110 exams of MAs during 2014 and 2015, checking for compliance with requirements on registration, the statutory fiduciary standard of care, fair dealing, recordkeeping and supervision, among other things.
MAs are required to register with the SEC and MSRB using Form MA and must annually update those forms within 90 days after the end of their fiscal years. Firms must also promptly amend the forms with any material changes. MA firms must register each associated person engaged in MA activities on its behalf on Form MA-I and must promptly amend those forms if the information becomes inaccurate.
In addition, MA firms must file Form A-12 with permanent registration numbers, affirm the forms annually, and update them within 30 days if information becomes inaccurate. Rule A-12 requires MAs to pay an initial fee of $1,000 and an annual fee of $1,000.
OCIE staff said they frequently observed registration deficiencies such as the failure to register with the SEC or MSRB prior to engaging in MA activities or update their Forms MA and amend Forms MA and Forms MA-I when required. Firms also failed to provide accurate and complete information on Forms MA, particularly with respect to compensation arrangements and outside business activities. The staff found some MAs didn’t pay fees and late fees and failed to file Forms MA-W and withdraw Forms A-12 when withdrawing MA registration.
OCIE staff said they frequently found recordkeeping deficiencies. These included the failure to maintain copies of written or electronic communications sent or received by the firm related to MA activities. MAs also failed to make and keep documents material to a recommendation made to a client. Some firms, the OCIE staff said, didn’t prepare and maintain general ledgers accurately reflecting assets, liabilities, reserves, capital and income and expense accounts. In addition, some MAs didn’t maintain accurate records of cash receipts and disbursements.
The staff also said it frequently found MA firms failed to have a system to supervise MA activities of employees that were reasonably designed to achieve compliance with rules. Firms also did not monitor or keep accurate and searchable records of gifts, travel, and entertainment expenses. In addition, firms sometimes failed to tailor written supervisory procedures to the firm’s business activities or conflicts of interest and failed to designate one or more principals to be responsible for supervision.
The OCIE staff said it welcomes suggestions about how its examination program can be improved.
The staff also urged anyone who observes or suspects illegal or other deficient activity that harms investors to report it at “http://www.sec.gov/complaint/info_tipscompliant.shtml.”