CHARLESTON, S.C. – Securities and Exchange Commission officials updated National Association of Municipal Advisors members here on the status of the commission’s municipal advisor examinations and fielded questions about continuing compliance with the program.
About 690 municipal advisors have registered with the SEC and the commission’s office of compliance inspections and examinations has direct examination authority over approximately 75% of those MAs, according to Robert Miller, an SEC staff attorney who spoke on an OCIE panel at NAMA’s annual conference.
The examination program was announced in August 2014 and is designed to assess all registered MAs on regulatory areas such as registration, disclosure, fair dealing, supervision, books and records, as well as training and qualifications over a two-year period. The SEC is responsible for examining all non-dealer MAs while the Financial Industry Regulatory Authority is responsible for dealer MAs.
Miller said it is “probably correct” that OCIE will finish with their exams during the two-year window, but added that some MAs may be hearing from the SEC sooner than others depending on risk assessments that look for potential problems with a firm’s forms, employees, or background history.
The exams this year have already identified a number of issues in firms, including that they: did not have written supervisory procedures; had WSPs that did not address compliance with applicable securities regulations or; had personnel who did not comply with the WSPs, according to Nadine Sophia Evans, senior special counsel with OCIE who is based in Atlanta and joined Miller on the panel.
There have also been instances of firms failing to register with both the SEC and Municipal Securities Rulemaking Board and failing to maintain proper books and records, exhibited by the comingling of firm and individual accounts.
Evans also reminded attendees of the conference that MAs have a fiduciary duty to put their clients’ interests first before their own under the Securities and Exchange Act of 1934.
The exams, which are handled by 11 SEC regional offices, analyze firms’ compliance with both regulations that are already in place as well as those that are still being formulated.
Miller said OCIE recognizes that some of the areas the exams cover are not yet regulated. He added that asking about those areas is part of his office’s ongoing effort to learn about the MA industry. OCIE also is cognizant of when certain rules were first put in place. The office operates within the parameters of the specific dates depending on the area of deficiency it is looking for, Evans said.
“For the first two years, it will be a learning process for both of us,” Miller said. “While we may cite some violations, we’ll also be looking at other areas to let the commission and others know what we’re seeing.”
Each exam cycle is split into four parts, Evans said. The first phase happens prior to the onsite visit and includes staff members getting to know the firm’s operations through contacting municipal clients, requesting documents from the firm, and possibly getting a high level walkthrough of the firm’s operations. OCIE then schedules and starts its onsite visit, where the examiners meet and conduct interviews with advisors, clients, staff and management to clarify any potential issues. The examiners have a preliminary interview with the firm at the end of the second phase to identify next steps in the process and any problems found in the onsite review.
Examiners then enter the post-field work phase where they can request additional documents if necessary. OCIE closes out the process by sending the firm a letter identifying any weaknesses or deficiencies they found and giving it 30 calendar days to respond. The examiners will then agree or disagree with the firm’s responses.
If OCIE does not find issues in the course of its review, a firm will receive a no further action letter.
Miller said the data on how many examinations have so far resulted in deficiency letters is not yet available, but that OCIE hopes “to at some point in the future maybe put something out that goes over the breakdown.”
He also responded to several questions about the link between a deficiency letter and enforcement, saying the letters do not always signal impending enforcement.
“Depending on the nature of the violations we see, if there are things that give us serious concern, we may refer that to enforcement or it may be a process where in the deficiency letter we will ask you to respond to what we noted and give us what corrective actions you are taking,” Miller said. “Generally before we decide whether we will recommend enforcement actions, we will look at the rules and regulations, the fact pattern, we will talk to our colleagues in the MSRB, FINRA, and the Commission.”
Both Miller and Evans also used their time on the panel to recommend MAs work with the OCIE examiners to make the process as easy as possible for both parties. They said most examiners will be flexible if the number of documents requested is too much for a small firm to provide in the given number of days or if MAs have questions about what the examiners are specifically requesting.
“One of the things I want to stress here today is to communicate with the exam staff,” Miller said.
Audience concerns about how OCIE is overseeing the still relatively new initiative were met with assurances from both Evans and Miller that there are centralized practices to keep examinations consistent throughout the 11 regional offices.
The office has exam kits that list suggested questions and documents to request when an examiner is trying to learn about a firm’s compliance with the main areas of the exams. If needed, examiners can then diverge from those suggestions to tailor their investigation to the specific firms and circumstances as long as “it is in the realm of the legal regulatory scheme,” Evans said.
OCIE also has an internal system where it collects all exam information, background analysis, and deficiency letters. It then reviews them to “make sure they are consistent and measure up,” Evans said.
“We do have internal conversations with examination staff to make sure people are not too far afield with what they’re asking,” Evans said. “If we have questions about what we’re seeing, we’ll reach out to our regulatory partners.” She added that she and OCIE staff in Washington look at all the deficiency letters “to make sure they are consistent especially with the rules kind of being in flux” and that the examiners “are completely accurate in their legal and regulatory assessment.”
Ongoing training is also a main focus for Evans and OCIE. They hold monthly meetings with the examiners to update them on the latest trends in the MA field and also to circulate new regulatory information on MA conduct.
When the exams conclude, Miller said the SEC will do a look back on the process and write up a summary of what it has learned. But he said it is up to the commission to determine whether that summary should be public.
