RIA Compliance Blog
Following its publication of a Risk Alert in late 2017 detailing findings from examinations of municipal advisers, the SEC’s Office of Compliance Inspections and Examinations (OCIE) continues to examine municipal advisers in 2018. In 2014, OCIE established the Municipal Advisor Examination Initiative to perform an examination on municipal advisers who recently registered for the first time. OCIE performed over 110 examinations in the course of the Initiative and found that many municipal advisers did not have adequate knowledge of regulatory requirements for municipal advisers. As a result, many municipal advisers were found not to be in adequate compliance with regulatory requirements pertaining to registration, recordkeeping, and supervision. OCIE hoped that in publishing the 2017 Risk Alert, municipal advisers will be compelled to evaluate their policies and procedures to find possible areas for improvement.
Municipal advisers are obligated to register with the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The SEC established its municipal adviser registration rules in September 2013, and the rules became effective in July 2014. The Dodd-Frank Act also established the Municipal Securities Rulemaking Board (“MSRB”), which exercises regulatory authority over municipal advisers. OCIE’s examinations of municipal advisers covered “compliance with regulatory obligations including registration, statutory fiduciary standard of care, fair dealing, recordkeeping, and supervision, among other things.” OCIE discovered that the most common deficiencies among municipal advisers related to registration, books and records, and supervision requirements.
To register as a municipal adviser with the SEC, a municipal adviser must file a Form MA: Application for Municipal Advisor Registration. The municipal adviser must also file annual updates to Form MA. It must also file a Form MA-I: “Information Regarding Natural Persons Who Engage in Municipal Advisory Activities,” for every individual who is an associated person of the municipal advisers. Municipal advisers are obligated to file amendments to Form MA and Form MA-I if material changes cause the previously filed information to become inaccurate. If the municipal adviser is a non-resident, has a non-resident manager, or has a non-resident associated person, it must file a Form municipal advisers-NR: Designation of U.S. Agent for Service of Process for Non-Residents. If a municipal adviser is no longer obligated to be registered as a municipal adviser because it has stopped participating in municipal advisers activities, it must file a Form municipal advisers-W: Notice of Withdrawal from Registration as a Municipal Advisor. The municipal adviser is also obligated to register with the MSRB prior to participating in municipal adviser activities. OCIE examiners found that in regards to registration, municipal advisers often did not register with the SEC or the MSRB prior to participating in municipal advisers activities. OCIE also found that municipal advisers often did not file annual updates to Form municipal advisers or file amendments to Form MA or Form MA-I when obligated to do so. OCIE also found that municipal advisers frequently did not file a Form MA-W to withdraw from SEC registration when necessary.
The Securities Exchange Act of 1934 obligates municipal advisers to maintain specified books and records. Books and records to be maintained include originals or copies of written communications the municipal advisers receives or sends pertaining to municipal advisers activities, copies of the municipal adviser’s policies and procedures that are presently effective or were effective at any time over the last five years, all written agreements the municipal advisers enters into with any municipal body, and a copy of the names of all current associated persons and those who have been associated persons within the last five years. OCIE examiners found municipal advisers frequently did not keep copies of written communications pertaining to municipal adviser activities that the municipal advisers had sent or received. OCIE also found that many municipal advisers ledgers “did not accurately reflect assets, liabilities, reserves, capital, and income and expense accounts.” OCIE also discovered that many municipal advisers did not keep “accurate records of cash receipts and disbursements.”
The MSRB requires a municipal adviser to have a supervisory system that covers the adoption and enforcement of written supervisory procedures that are sufficiently tailored to reach compliance with the MSRB’s rules and the appointment of a principal or principals to oversee supervision. OCIE found that many municipal advisers did not have a supervisory system that was sufficiently tailored to reach compliance with applicable rules. OCIE also discovered that many municipal advisers did not have written policies and procedures sufficiently tailored to reach compliance with relevant rules and did not designate a principal or principals to oversee supervisory activities.
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