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.