WASHINGTON – Public pension fund advisors are among a handful of new
"We will examine advisors to municipalities and other government entities, focusing on pay-to-play and certain other key risk areas to advisors of public pensions, including identification of undisclosed gifts and entertainment," the SEC's Office of Compliance Inspections and Examinations said in its annual list of examination priorities.
With regard to retail investors, OCIE said it will examine "potential conflicts and risks involving advisors to public pension funds."
Other new areas of focus include broker-dealer and investment advisor liquidity risk management practices, product promotion, exchange-traded funds and variable annuities, OCIE said.
"These new areas of focus are extremely important to investors and financial institutions across the spectrum," SEC chair Mary Jo White said in a release. "Through information sharing and conducting comprehensive examinations, OCIE continues to promote compliance with the federal securities laws to better protect investors and our markets."
OCIE said it will also continue to conduct examinations of newly-registered muni advisors to assess their compliance with recently adopted SEC and Municipal Securities Rulemaking Board rules. This initiative will include industry outreach and education, it added.
The office plans to use data analytics to help detect excessive trading as well as track individuals with a record of misconduct and the firms that employ them. The office also plans to review private placements to evaluate whether due diligence, disclosure and suitability requirements are being met.
OCIE said its list "is not exhaustive" and that it welcomes suggestions on how it can better promote compliance, prevent fraud and monitor risk.
OCIE's focus on MAs comes as advisors have, and will continue to have, access to a lot of guidance on a growing number of rules.
OCIE sent a letter to muni advisors on Aug. 19, 2014 explaining its national exam program and areas it planned to examine, including registration requirements, the fiduciary duty to put clients' interest first, disclosure and fair-dealing obligations, as well as supervisory, books and records and training requirements.
The MSRB published its first-ever compliance advisory guide for MAs on Nov. 12 of last year.
And the three agencies that regulate or enforce laws and rules for MAs – the SEC, MSRB, and Financial Industry Regulatory Authority – plan to hold a compliance outreach program for muni advisors on Feb. 3 in Philadelphia.
Several key MA rules are moving forward.
The MSRB plans to implement its Rule G-20 on gifts and gratuities for MAs on May 6. Amendments extending this rule to MAs, which were approved by the SEC in November, would generally prohibit an MA from receiving more than $100 per year in payments or services related to the muni activities of his or her employer. But the rule contains several exceptions.
Beginning in June, the MSRB's Rule G-42 on core standards rule for MAs will take effect. Under this rule, which the SEC approved on Dec. 24, MAs owe a fiduciary "duty of loyalty" to their municipal issuer clients and are required "without limitation … to deal honestly and with the upmost good faith with a municipal entity and act in the client's best interests without regard to the financial or other interests of the municipal advisor."
MAs also have a "duty of care" to: exercise due care in their work; be qualified to provide advisor services; make a "reasonable inquiry" into the facts relevant to a client's request before deciding whether to proceed; and undertake a "reasonable investigation" to determine their advice is not based on bad information. The rule bans an MA from acting as a principal in any transaction with a muni issuer client that is directly related to a deal on which the MA is providing advice.
The MSRB also has asked the SEC to approve amendments to Rule G-37 designed to prevent MAs from engaging in pay-to-pay practices, under which they would make political contributions to issuer officials to get muni advisory business.
Rules G-20 on and G-37 already apply to broker-dealers.
