The municipal advisory firm and one of its principals charged in a first-of-its-kind case in September is asking a federal court in California to dismiss the lawsuit, arguing that the Securities and Exchange Commission is using the action to "test drive" a rule it didn't properly define.
The defendants motion to dismiss, filed Monday, comes after the SEC, in its
“The case against Choice and Mr. O’Meara relies heavily on circular, interrelated, conclusory allegations that assert fraudulent conduct without support and which focus on reasonable business practices that are not clearly prohibited by the relevant law,” the filing states.
When the
Permenter
Without commenting on the specific details of the case, Susan Gaffney, executive director of the National Association of Municipal Advisors, noted that Rule G-42 signals the ongoing importance of fiduciary responsibility.
“We strongly encourage MA firms to develop robust policies and procedures on how they address all aspects of Rule G-42,” Gaffney said, adding, ”Demonstrating their approach to all fiduciary duty matters, including conduct and disclosures to clients, should be the foundation of a firm’s regulatory and compliance program.”
Financial Industry Regulatory Authority records show that O'Meara and Permenter were both registered brokers at BB&T Securities until 2018 before, the SEC found, leaving to start Choice Advisors.
The SEC found that once at Choice, the two principals entered into a fee-splitting arrangement with their former employer and did so without disclosing either the arrangement or their relationship with the underwriting firm, to their clients.
In addition to the fee-splitting arrangement, the SEC alleged that Choice, O’Meara, and Permenter unlawfully engaged in municipal advisory activities when they were not registered with the SEC or the MSRB.
“While still employed at the underwriting firm, O'Meara allegedly improperly operated in a dual capacity, simultaneously serving as a registered representative for the underwriting firm, and also as a municipal advisor where he purported to serve as two clients' fiduciary,” the SEC said in its initial complaint.
The SEC further alleged that O’Meara, in particular, took action to increase the overall fees paid by the clients to enrich himself and Choice, which the SEC said resulted in nearly $40,000 in additional fees for one school.
In the motion to dismiss, Choice and O’Meara argue that the SEC’s complaint is flawed because it lacks support in both prior cases and the MSRB rule, and also violates due process principles.
“Numerous aspects of this case directly depend on the issue of “fee splitting” under MSRB Rule G-42. But...neither that rule nor any other direct legal authority defines that term. By Plaintiff’s own description, this is the first ever effort to enforce that rule. The SEC is using this lawsuit as an opportunity to test-drive the meaning of a rule that it never properly defined, at the expense of Choice, O’Meara and their business,” the defendants memorandum states.
Essentially, Choice and O’Meara argue that they are not liable for so-called fee splitting simply based on SEC allegations that they were paid at the same time as the underwriter.
They also contend that the SEC is relying on a novel interpretation of the term, “fee splitting arrangement,” which they say is not supported by prior cases involving undisclosed payments and breaches of fiduciary duty.
“Imposing liability for an entirely new interpretation of ‘fee-splitting’ without any prior notice is contrary to due process,” the filing says.
As a result, Choice and O'Meara add that “because there is no legal authority that supports [the SEC’s] application of the term to the benign conduct in this case,” the court should dismiss the SEC complaint as it relates to fee splitting.
The case is SEC v. Choice Advisors, LLC and Matthias O’Meara. Attorneys for Choice and O’Meara did not immediately respond to request for comment.
