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SEC Fines Muni Advisor in Dodd-Frank Fiduciary Case

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The Securities and Exchange Commission has fined a Prairie Village, Kansas-based firm for failing to disclose conflicts to a municipal client. This is the first time the SEC has enforced the fiduciary duty for municipal advisors under the Dodd-Frank Act, the agency said Tuesday.

The charges pertain to bond offerings made in 2011. The SEC charges that Central States, along with its CEO, John Stepp, and employees Mark Detter and David Malone, arranged for the offerings to be underwritten by a broker-dealer where they were registered reps. They didn’t tell their municipal client about that conflict, and collected fees from the city, as well as 90% of the underwriting fees paid to the broker-dealer, according to the SEC.   

“By failing to disclose their financial interest in the underwriting of the city’s offerings, Central States — the city’s municipal advisor — and its employees deprived the city of the opportunity to seek unbiased financial advice,” Andrew Ceresney, director of the SEC’s Enforcement Division, said in a statement.  “A municipal advisor’s first duty should be to its municipal client, not its own bottom line.”

The SEC charges that the respondents collected $130,120 in municipal advisor fees on the $14.7 million offerings. The broker-dealer collected $121,530, of which 90% was paid to Central States. Detter and Malone received commissions for their work on the offerings.

The Dodd-Frank Act made municipal advisors fiduciaries to their municipal clients with provisions that “were intended to mitigate some of the problems observed with the conduct of some municipal advisors, including undisclosed conflicts of interest and failure to place the duty of loyalty to their municipal entity clients ahead of their own interests,” according to the SEC.

According to the SEC’s administrative order, the respondents failed to meet those standards, as well as the Municipal Securities Rulemaking Board’s Rule G-17, which prohibits municipal advisors from engaging in any “deceptive, dishonest or unfair practice,” even if through negligence; and MSRB Rule G-23, which prohibits brokers from acting as advisors on municipal securities they’re underwriting.

The SEC issued a cease and desist order, to which the respondents consented without admitting or denying the charges. Central States will pay an $85,000 civil penalty, as well as disgorgement and interest of $289,827.80. CEO Stepp agreed to pay a $17,500 civil penalty and accepted a six-month suspension from acting as a supervisor at any broker-dealer, investment advisor or municipal advisor. Malone was fined $20,000 and barred from the financial services industry for a minimum of one year.

As the primary contact, Detter was charged with a fine of and a two-year bar from the financial services industry.

“As fiduciaries, municipal advisors must identify and address all material conflicts of interest by eliminating or disclosing such conflicts,” Jessica Kane, director of the SEC’s Office of Municipal Securities, said in a statement. “Municipal entities rely on the advice of their municipal advisors and must feel confident that those advisors are working in the municipal entity’s best interests.”

— Check out Beyond Mandatory Arb: 4 Options for Advisor-Client Dispute Resolution on ThinkAdvisor. 


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