SEC Finds MAs Didn’t Meet Rules

The Bond Buyer - - Front Page - BY LYNN HUME

WASH­ING­TON – Se­cu­ri­ties and Ex­change Com­mis­sion ex­am­in­ers found wide­spread non­com­pli­ance by mu­nic­i­pal ad­vi­sors in ex­ams they con­ducted over two years that re­sulted in some firms’ names be­ing sent 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 fur-

ther 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. They also had to regis­ter with the Mu­nic­i­pal Se­cu­ri­ties Rule­mak­ing Board and com­ply with its rules. The MSRB has been amend­ing its rules and adopt­ing new ones in some cases 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-1 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-1 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”

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