SEC charges 12 municipal advisors with recordkeeping failures for $1.3 million in penalties

In a sweeping move, the Securities and Exchange Commission has charged 12 municipal advisor firms with failing to maintain and preserve certain electronic communications, collecting civil penalties ranging from $40,000 to $324,000 for a total of $1.3 million.

That’s the latest in the commission’s two-year pursuit of “off-channel” communications in the finance sector, this time coming down on MAs after charging groups of broker-dealers, investment advisors, and just last month, credit rating agencies.

The firms charged are Acacia Financial Group, Caine Mitter and Associates, cFX Inc., CSG Advisors, Kaufman Hall & Associates (together with Ponder & Company), Montague DeRose & Associates, PFM Financial Advisors, Phoenix Advisors, Public Resources Advisory Group, Specialized Public Finance and Zions Public Finance.

All the firms violated MSRB Rules G-44 on supervisory and compliance obligations of municipal advisors, G-8 on books and records, G-9 on preservation of records.

In civil penalties, Acacia Financial Group agreed to pay $52,000, Caine Mitter and Associates agreed to $94,000, cFX Inc. agreed to $42,000, CSG Advisors agreed to $40,000; Kaufman Hall & Associates/Ponder & Company agreed to jointly pay $324,000; Montague DeRose & Associates agreed to $40,000; PFM Financial Advisors agreed to pay $250,000; Phoenix Advisors agreed to $40,000; Public Resources Advisory Group agreed to $184,000; Specialized Public Finance agreed to $250,000 and Zions Public Finance agreed to $47,000.

“The books and records requirements are critical to facilitating Commission inspections and examinations of municipal advisors and in evaluating a municipal advisor’s compliance with the applicable federal securities laws,” said Rebecca Olsen, deputy chief of the SEC’s Public Finance Abuse Unit. “Municipal advisors are encouraged to assess their recordkeeping practices relating to off-channel communications. Firms that believe their practices do not comply with the securities laws are encouraged to self-report to the SEC’s enforcement staff.”

In an alert, the National Association of Municipal Analysts executive director Susan Gaffney said that it’s important to note that the violations “are solely related to MA firms violating SEC and MSRB recordkeeping rules, and no other violations,” she said. “None of the violations are for breach of MA’s fiduciary duty or involve client services.”

In July 2023, the Commission began a “risk-based initiative to investigate whether municipal advisors were properly retaining messages related to municipal advisor activities that were sent and/or received by employees using unapproved electronic communication methods,” the SEC said. That follows the SEC’s enforcement priorities for this year, which singled out MAs, particularly solicitor municipal advisors, following the establishment of MSRB Rule G-46 on the core standards for solicitor municipal advisors.

The SEC also said just a few months ago that it has been seeing many unregistered MAs in public-private-partnerships, and in connection with charter schools. The Commission leveled charges at the end of August against a firm that acted as an MA on eight issuances for eight separate charter schools in Minnesota.

MSRB Rule G-9 on preservation of records requires firms to maintain and preserve records related to deals for no less than five years, the first two of which are to be in easily accessible locations. In some examples, the Commission outlined what was omitted in these records.

“For example, a municipal advisor principal at PFM Financial Advisors sent a text message to a municipal issuer client advising that if the municipal issuer client did not change the final maturity there would be two more months of debt service, but there would also be two additional months of interest earnings on the investment of bond proceeds at a favorable rate,” the SEC said. “In another example, a municipal issuer client sent a text message to a municipal advisor principal at PFM Financial Advisors confirming they were engaged, confirming the fee for the engagement, and requesting an updated copy of the agreement for advisory services.”

In an email exchange, a spokesperson for PFM Financial Advisors said “we are pleased to have resolved this matter.” The remaining firms did not immediately respond to requests for comment.

According to the Commission, Phoenix Advisors “sent and received texts with a deputy finance director at a municipal issuer client discussing the impact of a rating agency downgrade of the client’s credit rating on the client’s planned bond offering, including whether the client would have to pay higher fees,” the SEC said. “In another example, a managing director at Phoenix Advisors sent a text to a deputy finance director at a municipal issuer client related to the pricing of the client’s negotiated bond offering informing the client that the bond offering was oversubscribed and how this would impact interest rates.”

Another example showed that “an Associate at CSG and a CSG Executive exchanged text messages regarding the construction budget for an affordable housing project and the allocation of bond proceeds to pay post-construction interest and other fees to bond indenture accounts,” the SEC said.

NAMA urged firms to “be aware that any communications, regardless of their format that address ‘municipal advisory activity’ or are ‘related to municipal advisory activity’ must be maintained, easily accessible for retrieval and have duplicates of the communications stored separately.”

Gaffney also pointed out that “one of the great difficulties with these cases is that within the MA Rule, there is no definition of ‘related to municipal advisory activity,” she said. “NAMA is asking the SEC for clarification of this definition to help members understand which communications need to be maintained. NAMA will also ask the SEC to provide a Risk Alert that details MA recordkeeping responsibilities, as the SEC has done for other regulated entities.”