Why a muni advisor had to settle charges with SEC
WASHINGTON -- Carlsbad, Calif.-based Eric Hall & Associates and its president have agreed to pay more than $50,000 and be barred from the industry to settle Securities and Exchange Commission charges that the firm operated as an unregistered municipal advisor in violation of federal law.
In an SEC administrative order dated Sept. 20, Eric Hall and his firm (EHA) agreed to disgorge nearly $40,000 of ill-gotten gains to the commission and to pay a fine of $15,000 to the Municipal Securities Rulemaking Board without either admitting or denying the SEC’s findings.
The firm, located north of San Diego, allegedly violated federal securities laws that require MAs to register with the SEC and become subject to a fiduciary duty, as well as the MSRB’s Rule G-17 on fair dealing, when it provided bond advice to a California school district in 2015 and 2016.
Hall, 67, claims on EHA's website that he worked in public schools for 32 years, including as chief business official and associate superintendent for business services at San Dieguito Union High School District.
Hall founded the firm in 2006, the website claims, to “help other districts and provide personalized support services in school facility planning, funding and construction and budget, fiscal and human resources areas.” The site lists 19 other professionals at the firm in addition to Hall.
EHA was temporarily registered as a municipal advisor with both the SEC and the MSRB under the temporary rules in 2011, but the SEC alleged that the firm never became properly registered under the final registration rule that took effect July 1 2014.
Despite this, the SEC said, EHA served as a municipal advisor to a California school district on a 2015 bond offering and offered advice about a planned 2016 issuance that never occurred.
According to the SEC, Hall represented to the district in writing that his firm was eligible to serve as a “financial advisor” on a bond deal and would comply with all applicable “laws, rules and regulations.”
Under federal law, those who provide advice with respect to an issuance of muni bonds are required to register with the SEC and MSRB, and owe their clients a fiduciary duty to put the interests of clients ahead of their own.
The SEC found that Hall assisted the school district in scheduling the Oct. 20, 2015 bond offering, and advised the district as to the best timing to achieve a favorable interest rate. The order does not name the school district, but the official statement for an Oct. 20, 2015 issuance of $42 million of refunding bonds by the Vista Unified School District in San Diego County lists EHA as the financial advisor.
EHA's website also features a testimonial from Vista’s Assistant Superintendent for Business Services, Donna Caperton that praises the firm in part for “providing support for refunding general obligation bonds.”
Caperton did not respond to a request for comment, nor did other EHA clients contacted for this story. The use of such testimonials will be in violation of the MSRB’s new MA advertising rule when it becomes effective next year.
The SEC said that commission staff exchanged letters with Hall in mid-2016 alerting him of suspected unregistered muni advisor activity following the 2015 issuance, and that Hall “identified EHA’s past work on the school district’s 2015 bond offering as possible municipal advisory activity.”
But Hall did not mention work on the second deal, which was eventually canceled and instead told the SEC that his firm had not engaged in any muni advisory activity since the 2015 transaction. The SEC said that Hall told the commission the firm would properly register, but then proceeded to provide muni advisory services without registering.
The SEC said EHA and Hall’s conduct violated the registration and fiduciary duty requirements of the Securities Exchange Act of 1934, specifically Sections 15B(a)(1)(B) and15B(c)(1). The conduct also ran afoul of MSRB Rule G-17 because the EHA did not disclose its unregistered status to the district, which was a violation of the fiduciary duty according to the SEC.
Under the terms of the order, Hall is barred from the industry and subject to a cease and desist order, but may potentially apply for reinstatement in the future.
Hall said through his attorney that his firm will not be going out of business.
EHA "will continue to focus on serving California K-12 school districts by providing consulting services for facility planning and construction," he told The Bond Buyer. "We will continue to concentrate on providing long-term planning for new construction in order to modernize California’s schools and on supporting districts as they seek state funding, master planning, demographic studies, capacity inventories, and prioritization of facility projects."
The firm "will continue to be a leader in supporting school districts and advocating for the important role facilities play in improving the teaching and learning environment," he added.