PHOENIX – Municipal advisors can expect the number of examinations by the Securities and Exchange Commission to rise, and many need to work on improving their compliance procedures, members of the SEC’s Office of Compliance Inspections and Examinations said.
Two OCIE attorneys relayed that information to MAs gathered at the National Association of Municipal Advisors conference in Scottsdale, Ariz., Thursday. The two lawyers, supervisory attorney and examination manager Robert Miller and senior special counsel Nadine Sophia Evans, discussed the OCIE agenda for MA examinations as well as some of the more common problems they’ve encountered in three years of examinations of muni advisory firms.
OCIE performed about 82 MA examinations last year, Miller said, the most yet. A show of hands around the room indicated that most present had experienced an OCIE examination. Although budgetary restrictions have scaled back the number of of examiners doing MA exams to about 130, from more than 200, Miller said, advisors can still expect the number of OCIE visits to continue rising. While OCIE has seen MAs doing a number of things correctly and making compliance progress, both attorneys said they have seen a considerable amount of failures with respect to written supervisory procedures and record keeping.
Municipal Securities Rulemaking Board Rule G-44 on supervisory and compliance obligations of municipal advisors requires MAs to establish supervisory systems for their firms and to have written supervisory procedures (WSPs) “reasonably designed to ensure” compliance with all applicable rules. They also have to certify annually that they have those supervisory and compliance systems in place.
“We’ve noticed that most firms have written policies and procedures,” Miller said, but added that it has not been unusual to find that some members of the firm were not aware of or familiar with those procedures. Some firms, Miller said, have hired third-party consultants to design their compliance systems. While that isn’t a problem, Miller said, firms need to understand that they still have responsibility for those procedures. He shared an anecdote of one firm whose third-party-designed WSPs didn’t seem to match the activities of its business, and when questioned about that by OCIE admitted that they found it a bit odd but trusted in the expertise of their consultant.
“Needless to say, they got written up,” Miller said.
Some firms have even just copied Rule G-42 on the duties on non-solicitor municipal advisors into their WSPs, but can’t explain how they plan to comply, said Miller.
“That’s not good enough,” he said.
Evans said she has also observed some record-keeping problems, with firms co-mingling their business and personal financials, meaning that they have to turn over their personal records to OCIE examiners.
The SEC lawyers told the audience that the most common outcome of an examination is that the firm will receive a deficiency letter outlining the problems the SEC found, and it is common for firms to reply by explaining how they will correct those issues. Firms who disagree with OCIE’s findings can appeal them higher up the chain, Miller said, but examiners will also have vetted their findings through their superiors.
The NAMA conference concluded Friday afternoon.
