The Securities and Exchange Commission has charged Hamlin Capital Advisors and its employee Michael Ferrell Braun with breaching its fiduciary duty by failing to disclose in a timely manner that an affiliate of the firm was buying the bonds the firm was issuing for the charter school clients, a material conflict of interest.
Hamlin was charged with violating MSRB Rule G-17 on fair dealing, Rule G-42 on the duties of non-solicitor municipal advisors, Rule G-44 on supervisory and compliance obligations of municipal advisors and Exchange Act Section 15B(c)(1). Without admitting or denying the findings, Hamlin was fined $200,000 in civil penalties, $85,000 of which will go to the MSRB. Braun was fined $75,000 in civil penalties.
The administrative proceeding follows the SEC's increased focus on municipal advisors in recent months, whether that's for
In this case, Hamlin advised the charter school in question on the issuance of over $500 million in municipal securities, where an affiliate investment advisor of Hamlin then purchased either all or a substantial portion of the bonds without disclosing it until much later. The Commission did not name the schools.
"This affiliate relationship created a material conflict of interest which was not timely disclosed to the charter school clients until several days or sometimes weeks after Hamlin Advisors began advising on the structure, timing and terms of the particular offerings at issue," the SEC said. "Braun provided the advice to the charter school clients and was responsible for providing the conflicts disclosure and the agreements for municipal advisory services."
The arrangement created an incentive structure for both the firm and the affiliate buying the bonds in relation to the charter school clients.
"For example, Hamlin Advisors had a financial interest in Hamlin affiliate's receipt of a higher interest rate on the bonds, while the charter school clients had an interest in paying a lower interest rate on the municipal bonds. Similarly, Hamlin Advisors had an interest in Hamlin Affiliate receiving a bondholder representative fee (or a higher fee) while the charter school clients had an interest in paying no fee (or a lower fee)."
Hamlin's disclosures were also inadequate, only stating that the firm and its affiliate had common ownership and that both firms could receive fees.
"It did not disclose that Hamlin Advisors had a financial incentive that was opposed to the interests of the charter school clients, due to its affiliation with the Hamlin affiliate," the SEC said. "Further, Hamlin Advisors's disclosure was inadequate because it did not adequately describe the nature, implications and potential consequences of the conflict and did not disclose how it planned to manage and mitigate the conflict."
Advisory agreements with the charter school also did not disclose the scope of the municipal advisory services on the deals in question.
MSRB Rule G-42 on the duties of non-solicitor municipal advisors requires disclosure to be made prior or upon engaging in municipal advisory services.
