The Securities and Exchange Commission on Thursday charged a firm and its two principals with violating numerous duties under Municipal Securities Rulemaking Board Rule G-42, which lays out the core responsibilities of municipal advisors.
The actions--which are the first enforcement cases the SEC has brought under the 2016 rule--were brought in the U.S. District Court for the Southern District of California against a municipal advisor firm, Choice Advisors LLC and two of its principals, Matthias O’Meara and Paula Permenter.
The SEC alleged that Choice, O’Meara, and Permenter violated their fiduciary duties, and engaged in unregistered municipal advisory activities. The agency also charged them with engaging in deceptive practices and violating fair dealing requirements with respect to Choice’s charter school clients.
“It is critical that municipal advisors comply with MSRB Rule G-42, which sets forth core standards of conduct including the disclosure of conflicts,” LeeAnn Gaunt, chief of the SEC Enforcement Division’s Public Finance Abuse Unit said in
“Schools and other municipal entities should be able to trust that municipal advisors are serving their clients’ interests and not their own,” Gaunt added.
According to the SEC
The SEC found that once at Choice, the two principals entered into a prohibited 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.
The SEC 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.
Susan Gaffney, executive director of the National Association of Municipal Advisors said that the SEC’s case highlights an issue that the association has “raised repeatedly with the SEC and MSRB as a problem in the market – unregistered [municipal advisors].”
“MA’s have a responsibility to fully comply with all SEC and MSRB rules, most importantly being properly registered and fulfilling their MA duties as specified in MSRB Rule G-42,” Gaffney added.
In the complaint and order, the SEC seeks permanent injunctions, disgorgement and prejudgment interest as well as civil penalties.
Permenter has agreed to settle with the SEC and consented--without admitting or denying any findings--to the entry of an
The SEC ordered Permenter to pay a $26,000 penalty and to participate in training on non-solicitor municipal advisor duties. She will also have her engagement letters reviewed by a third party for one year.
These SEC enforcement actions follow other recent cases brought against municipal advisors who provide services to school clients. Gaffney said she welcomes the SEC’s efforts to protect issuers.
“The SEC’s Enforcement Division’s attention to this matter, and hopefully others, will work to ensure that issuers are protected when they secure and utilize MA services,” Gaffney said.
Lawyers representing O'Meara, Permenter, and Choice did not immediately respond to requests for comment.
