By Anne Sherry, J.D.
An SEC-hosted regulatory roundtable on the nascent regulatory regime for municipal advisors took an optimistic outlook, even as an OCIE risk report identified compliance deficiencies uncovered in examinations. Panelists from the MSRB, SEC, and FINRA see the rules as providing opportunities and a level playing field for firms, while mitigating issues in the marketplace and giving tools to regulators. Mark Zehner of the SEC’s Division of Enforcement quipped that he hopes the regime puts him out of a job.
Examination deficiencies. The risk alert is a short document that both identifies the forms and compliance obligations relating to municipal advisors and identifies OCIE staff’s observations in over 110 examinations of MAs. The regulatory roundtable closed out a compliance outreach program held at the SEC’s Atlanta office. When Ritta McLaughlin (MSRB) opened the discussion by asking what keeps the panelists up at night, OCIE examiner Nadine Sophia Evans referred to the risk alert. It is critical for advisers to understand their obligations, and the examinations revealed books-and-records deficiencies, inadequate policies and procedures, written supervisory procedures that do not reflect what the firm is actually doing in practice, and “the elephant in the room” of registration issues. Evans added that MAs should look at the spirit of the rules to focus on what the regulators were ultimately trying to achieve.
Other panelists echoed the concerns about failures to register and what FINRA examination manager Gene C. Davis called a “lackadaisical” approach toward compliance. Rebecca Olsen of the SEC’s Office of Municipal Securities questioned whether form documents are really being used thoughtfully, after reflection and customization for each particular deal.
A rosy outlook. Despite these qualms, the panel seemed unanimously optimistic about the regulatory regime’s impact on the industry. Zehner said that a good class of registered MAs is the antidote to the problem of clients getting railroaded into unsuitable investments. The regime should give MAs confidence that they will be protected and their interests will be addressed. Gail Marshall, chief compliance officer of the MSRB, hopes that MAs will see the entities represented by the panel as resources and not “mean regulators.” She cited OCIE’s risk alert and added that the MSRB has educational resources and webinars, a needs analysis example, training plan template, and FAQs.
Practical advice. The panelists also offered some practical advice focused around dynamic procedures and best practices. When asked what an MA should do if a client wants to take on more risk than the advisor thinks is suitable, Olsen said the advisor should go through the normal steps and diligence to come up with a recommendation for the client. If the client is unswayed, the advisor does not need to disengage, but may want to document the engagement well. Zehner added that the MA needs to remember that the client is not the individual, but the entity. He cited an enforcement example where a mayor was so adamant that the advisor had gotten the numbers for feasibility runs wrong that the advisor changed them. The mayor was happy and all was well—until the bonds went into default.
As for processes and procedures, Evans suggested that MA firms create a cheat sheet of compliance dates and requirements and do regular (monthly or bimonthly) checkups. Davis agreed, clarifying that when the panelists talk about processes, they don’t mean simply keeping a manual that states what fiduciary duties are owed. It means having a checklist, asking whether a particular procedure was followed or disclosure made. Making a point of documenting deals with memoranda and referring back to them later is another example of a process, he said. Zehner affirmed that documentation is critical, adding that if enforcement staff see a contemporaneous memo, it demonstrates that the firm was not trying to hide the ball.