The Securities and Exchange Commission’s Division of Examinations plans to home in on municipal advisor obligations, transfer agents and continued oversight of FINRA and the MSRB.
That was according to the Division of Examination’s (EXAMS) 2022 Examination Priorities published Wednesday, marking the tenth consecutive year of its publication. The report touches on a few muni market issues of focus for this year amid other fixed-income market issues. It also touches on hot-button issues such as ESG and crypto that are likely to remain hallmarks of the Gary Gensler chairmanship.
But for the muni market, the report largely follows what has been singled out by the Commission’s Division of Enforcement in previous years.
“It's similar to the priorities that they have mentioned over the years and ones that MAs know that they need to be acutely aware of,” said Susan Gaffney, executive director for the National Association of Municipal Advisors.
“In this time of heightened market volatility, our priorities are tailored to focus on emerging issues, such as crypto-assets and expanding information security threats, as well as core issues that have been part of the SEC’s mission for decades – such as protecting retail investors,” said Division of Examinations’ acting director Richard Best. “Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs.”
In its review of the 2021 fiscal year included in the report, the Division of Enforcement was “about on par with pre-COVID-19 pandemic examination totals in FY19,” the report said, conducting 3,040 examinations, a 3% increase from 2020.
The Division's Broker-Dealer and Exchange Examination Program, which conducts examinations of municipal advisors and to the degree possible, municipal issuers, highlighted the importance of accurate and timely disclosures.
“Timely and accurate municipal issuer disclosure is vitally important to investors and the markets for these securities,” the report said. “The Division will examine the activities of broker-dealers, underwriters and municipal advisors to assess whether these firms are meeting their respective obligations, as and to the extent applicable, in relation to municipal issuer disclosure.”
They continue to focus on standards of conduct on Regulation Best Interest, a hallmark of former chairman Jay Clayton's push for protecting retail investors, and examinations will include assessments of practices regarding consideration of alternatives with respect to potential risks, rewards and costs, management of conflict of interest, trading, Form ADV and Form CRS disclosures, account selection and account conversions and rollovers.
Additionally, they will examine “whether municipal advisors have met their fiduciary duty and conflict disclosure obligations to municipal entity clients,” the report said. They will also examine “whether municipal advisors have satisfied their registration, professional qualification, continuing education and supervision requirements.”
The SEC is also taking a closer look at transfer agents' core functions, including timely turnaround of items and transfers, recordkeeping and record retention, safeguarding of funds and securities and filling obligations with the Commission.
“Examination candidates will include, among others, never-before-examined transfer agents and transfer agents that service microcap or municipal bond issuers, use novel technologies (e.g. blockchain or online crowdfunding portal applications), or engage in significant paying agent activity,” the report said.
The division will also continue its oversight of the Financial Industry Regulatory Authority with respect to certain broker-dealers and municipal advisors, in addition to Municipal Securities Rulemaking Board rules.
“EXAMS, along with FINRA and the federal banking regulators, conducts examinations of registered firms to assess compliance with MSRB rules,” the report said. “EXAMS also applies a risk assessment process, similar to the one it uses to oversee FINRA, to identify areas to examine at MSRB,” the report said. “Examinations of MSRB evaluate the effectiveness of MSRB’s policies, procedures and controls.”
