Bonds

SEC seeing many unregistered MAs in P3s, charter schools

The Securities and Exchange Commission is seeing an increase in unregistered municipal advisor activity related to charter schools and public private partnership financings as its focus on MAs begins to harden.

That’s according to representatives from the SEC gathered on Tuesday for Practicing Law Institute’s SEC Speaks in 2024 event.

“One of the things that we’ve been looking at a lot from a policy perspective and also working with exams on is unregistered advisory activity,” said Adam Wendell, deputy director of the SEC’s Office of Municipal Securities. “Firms that are dealers and investment advisors and other types of registrants need to be aware of when they’re engaged with municipal entities or municipal obligated persons, are they crossing that line into something that may require registration? Or do they fit into one of the exceptions in the rule?”

The SEC is noticing an increase in the amount of unregistered municipal advisors participating in charter school and public-private partnership financings. Photographer: Al Drago/Bloomberg

Bloomberg News

Exceptions to the rule that Wendell mentioned include situations in which an issuer has affirmed it has its own MA and will rely on that advice. Or, a firm can avoid MA registration if it fits into the underwriter exemption or several others that exist for auditors, engineers, and others who may work on a deal in a limited capacity. But outside of what the SEC is seeing within the examination division, there are bigger concerns with unregistered municipal advisors.

“For the most part, this isn’t going to show up in exams because the firms I’m going to talk about aren’t registered at all and are therefore not subject to examinations,” Wendell said. “There are a few sectors of the municipal market where we’ve noticed an increase in what we think is unregistered municipal advisor activity and two big examples of those are the charter school financing sector and in the public-private partnership or P3 sector.”

“If you are a registered firm and you’re engaged in municipal securities in any of those sectors, or really any sector but those are the ones the Commission is looking at, it may be a good idea to keep an eye on firms that call themselves consultants that may be engaged in unregistered municipal advisory activity, causing harm to clients that may be theirs, but may also be yours,” Wendell said.

The Commission has ramped up its focus on municipal advisors in recent years, leveling its first-ever charges in violation of MSRB Rule G-42 on the duties of municipal advisors against Choice Advisors and its two principals in September 2021 for engaging in unregistered MA activity related to charter schools.

But even before leaning on MSRB Rule G-42, the Commission charged another firm in 2020 for providing advice to charter schools that issued $222 million in municipal bonds through conduit issuers. 

The Commission also singled out solicitor municipal advisors, a small subset of the wider MA field, as an examination priority in FY 2024. Core standards for solicitor MAs were also established last year as part of new MSRB Rule G-46.

Wendell touched on the progression of MAs, who came under the purview of the Commission with the passage of the Dodd-Frank Act in 2010, and how the Commission’s view of them has changed.

“In the first several years after the final rules were put into effect, I think most exams focused on registration and documentation requirements, things like written supervisory procedures, engagement letters, books and records, documentation and maintaining your registration form,” Wendell said. “Now, we’ve been working with exams over the past couple of years and ramping up to talk more about substantive conduct compliance obligations,” he added. “Some examples of that are the municipal advisory role in pricing, obtaining the best pricing for their municipal entity clients, and whether they are doing everything they’re supposed to be doing in accordance with their fiduciary duty.”

The OMS is also looking at how MAs are advising their clients in competitive vs. negotiated sales and which of them might be the best option for the specific client, in addition to other duties related to MSRB rule obligations.

“We’re talking about moving more towards the substantive compliance examinations but the documentation issues, registration and form filing issues do still remain,” Wendell said. “Municipal advisors and their attorneys do need to continue to focus on that and make sure that the documentation remains in place.”

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