SEC Issues Risk Alert for Municipal Advisors

On August 22, 2022, the SEC’s Division of Examinations (“the Division”) issued a Risk Alert presenting the agency’s recent observations from municipal advisor examinations. The Alert reminded municipal advisors (“MAs”) of their regulatory obligations, including describing the deficiencies and weaknesses most frequently cited in recent exams, and encourages MAs to review these areas and assess their compliance with each. In addition, the Alert puts MAs on notice that, in future examinations, the Division will focus more prominently on the core conduct and duty standards applicable to MAs.

Below is a summary of the deficiencies and weaknesses cited most often by the SEC staff in the Division’s recent examinations:

1. Registration and Filings

a. Filings with Inaccurate, Incomplete, or Inconsistent Information

• SEC Form MAs were filed with inaccurate or incomplete information regarding affiliates, solicitation activities, other businesses, and the types of activities engaged in. In addition, forms were also  inaccurate or incomplete information regarding associated persons’ other businesses, customer complaints, and tax liens.
• SEC Form MAs were filed with information inconsistent with information provided on MSRB Form A-12s.

b. Failure to Make Amendments or to Make Timely Amendments

• SEC Form MAs were not amended to reflect changes in ownership or disciplinary disclosures.
• SEC Form MA-Is were not amended to reflect changes in associated persons’ employment and other businesses or to add new disclosures related to civil judicial actions, judgments, or liens.
• MSRB Form A-12s were not amended to reflect changes in contact information or business activities.

c. Annual Filing Requirements

• MAs failed to file annual updates to their SEC Form MA.
• MAs did not review, update, and affirm the information in MSRB Form A-12 on an annual basis.

d. MSRB Fees

• MAs did not pay the required MSRB initial and annual registration fees.

2. Recordkeeping

MAs failed to create or maintain true, accurate, and current copies of certain books and records as required by MSRB rules. These books and records included the following:

• Originals or copies of written communications (including electronic communications sent from personal email addresses, text messages on mobile devices, and instant messages) related to their municipal advisory activities
• Financial and accounting documents such as general ledgers and cash reconciliations
• Records concerning compliance with the MSRB supervision and compliance rule (MSRB Rule G-44), e.g., annual certifications and the chief compliance officer designation
• Written consents to service of process from the MA’s associated persons
• Copies of documents material to making a recommendation to a municipal entity or obligated person
• Written agreements between the MA and municipal entities and their employees and obligated persons

3. Supervision

a. Failure to Establish, Amend, or Design Written Supervisory Procedures (“WSPs”)

• MAs failed to adopt WSPs.
• MAs o failed to amend their WSPs promptly to reflect changes in applicable rules.
• WSPs were also found to not be reasonably designed ensure compliance with applicable rules, including those related to gifts, gratuities, expenses, the preservation of electronic communications, or the filing and updating of required forms.
• WSPs also did not take into consideration the MA’s particular organizational structure, nature of advisory activities, or the relevant outside business activities of its associated persons.

b. Annual Reviews and Certifications

• MAs failed to conduct their required annual WSPs reviews.
• CEOs failed to certify annually in writing that their MA had in place processes to establish, maintain, review, test, and modify WSPs.

4. Disclosure to Clients

a. No Disclosure of Conflicts

• MAs failed to disclose the nature of relationships between the MA and other MAs that shared a common client or the MAs and their clients.
• MAs also failed to disclose the nature of relationships between the MA and underwriters or other parties providing services to or on behalf of a client.

b. No Statement of Lack of Known Conflicts

• MAs failed to provide their clients with written statements that the MA has no known material conflicts of interest.

c. Inadequate Documentation of Relationship

• MAs did not document their advisory relationships.
• MAs did not include all required elements within their documentation.
• MAs did not promptly amend or supplement their documentation to reflect material changes in their advisory relationships.

d. Untimely Documentation or Disclosure

• MAs failed to provide the required conflicts disclosure or the required documentation of an advisory relationship prior to or upon engaging in municipal advisory activities.

Our guidance

Firms should note this Alert and assess their practices and procedures to confirm that their documentation reflects the SEC and MSRB regulatory requirements regarding the accuracy and completeness of the MAs records and forms.

How we help

We can help you understand how the SEC and MSRB regulatory requirements addressed in the Alert relate to your municipal advisory business. Among other services, our consultants can assist with the timely and accurate creation, maintenance, and filing of the documentation needed to meet any and all relevant obligations.

For more information about municipal advisory regulatory requirements or how we can help your firm comply, please reach out to your ACA consultant or contact us.

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