PHOENIX - The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations will focus some of its efforts on municipal advisors, best execution, and oversight of self-regulators in the muni market, OCIE said in its newly-released priorities.
OCIE’s 2018 priorities, released Wednesday, detail to some degree where SEC examiners will be focusing their efforts in the coming months. While oversight of the muni market is only a part of the SEC’s responsibility, the document touches on several muni-specific issues and areas of focus.
SEC chair Jay Clayton has taken an interest in the fixed-income markets, where many “main street” retail investors put their money. The Municipal Securities Rulemaking Board, which writes muni rules and which is overseen by the SEC, is in the midst of a major effort to facilitate better compliance with its rules.
"I appreciate OCIE's dedication to maximizing the effectiveness of their resources with a keen eye toward asset verification, market infrastructure, and duties owed to retail investors," Clayton said.
The first muni-specific issue touched on by the priorities document is municipal advisors. MAs owe a fiduciary duty to the issuer and other municipal entity clients to whom they give bond-related advice, and OCIE examiners have said publicly that exams over the past two years have revealed many firms still adjusting to the new regulatory regime governing MAs.
“We will continue to examine municipal advisors to evaluate their compliance with registration, recordkeeping, and supervision requirements, particularly those municipal advisors that are not registered as broker-dealers,” OCIE said. “Examinations will also review for compliance with MSRB rules regarding professional qualification requirements, continuing education requirements, and core standards of conduct and duties of municipal advisors when engaging in municipal advisory activities.”
National Association of Municipal Advisors executive director Susan Gaffney said the priorities laid out for MAs struck her as appropriate, and said that muni advisors have benefited from the SEC’s communications about shortcomings found in past exams.
“We’ve appreciated their sharing their findings with the MA community,” Gaffney said.
Securities Industry and Financial Markets Association managing director, associate general counsel, and co-head of munis Leslie Norwood said her group is pleased that the SEC will be closely regulating non-dealer advisors.
“SIFMA supports the vigorous enforcement of the rules as written to ensure orderly markets,” she said. "As municipal securities broker dealers acting as underwriters and municipal advisors have been subject to examination by the Financial Industry Regulatory Authority for compliance with the MSRB rules, we encourage OCIE to examine the non-dealer municipal advisor community with the same vigor.”
The document mentions briefly that OCIE will continue to examine muni underwriters for compliance with SEC and MSRB rules before moving on to best execution. The MSRB’s best execution rule took effect in 2016 and requires dealers to seek the most favorable terms reasonably available for their retail customers’ transactions.
“We will conduct examinations to assess whether broker-dealers have implemented best execution policies and procedures, consistent with regulatory requirements, for both municipal bond and corporate bond transactions,” OCIE said.
The document also mentions oversight of FINRA and the MSRB.
“Our examinations of FINRA will focus on FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors that are also registered as broker-dealers,” OCIE said. “Given the responsibility of the MSRB to regulate municipal securities firms, examination staff will examine the MSRB to evaluate the effectiveness of select operational and internal policies, procedures, and controls.”
MSRB executive director Lynnette Kelly welcomed the prospect.
“The SEC’s oversight of the MSRB, including periodic examination, is essential to the success of our self-regulatory model,” she said. “Under that model, Congress provides the SEC with the tools to ensure that we are operating effectively and fulfilling our statutory responsibilities.”