Articles Posted in Municipal Advisors

Municipal Advisor Accused of Not Telling Client About Conflict
In the first case enforcing municipal advisor’s fiduciary duty under the 2010 Dodd-Frank Act, the SEC is filing charges against Central States Capital Markets, its CEO John Stepp, and two employees. The regulator claims that in 2011, David Malone and Mark Detter arranged for a brokerage firm to underwrite the municipal bond offerings. Both of them and Stepp were registered representatives at the firm. They did not tell one particular municipal client about this relationship or that they would benefit financially from the arrangement.

In three offerings, said the SEC, Central States was paid fees from “the City” for advisory work and also received 90% of the underwriting fees. The regulator said that Central States and the three men breached their duty to the client by not revealing the conflict even though they knew this was an issue. The SEC said this failure to disclose the conflict prevented the city from being able to obtain financial advice that was unbiased.

Central States and the three men consented to the SEC’s order without denying or admitting to the findings. Central States will pay $289,800 in disgorgement and interest and an $85K penalty. Detter will pay a $25K penalty and serve a two-year financial services industry bar, Malone will pay a $20K penalty and serve a one-year industry bar, and Stepp will pay a $17,500K penalty plus serve a suspension of six months from acting in a supervisory role with any brokerage firm, municipal advisor, or investment adviser.

Microcap Company CEO Charged With Making False Claims, Including Fake Clean Energy Contracts With Foreign Governments
The Securities and Exchange Commission is charging Cary Lee Peterson, who is the CEO of RVPlus Inc., with making false claims of having lucrative ties with the United Nations and billions of $2.8B of clean energy contracts with governmental bodies in Liberia, Haiti, and Nigeria. In truth, RVPlus had no connections with the U.N. and the contracts at issue never existed.

According to the regulator, Lee Peterson made bogus claims in public filings for the company and statements that he made to private investors, took control of over 90% of RVPlus’s free trading shares, and issued them to individuals who illegally sold them into the market. In SEC filings, Peterson claimed on more than one occasion that RVPlus had put out invoices and was owed millions of dollars from the contracts.

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Many banks are reportedly greeting bipartisan Senate bill S. 710 with satisfaction, as it would exempt them from provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to regulating municipal advisers. The bill was introduced by US Senators Patrick Toomey (R-Pa) and Mark Warner (D-VA) last month.

The Dodd-Frank Act established municipal advisers as a new class of regulated individuals that advise local and state governments about financial matters, such as the use of derivatives and bond issuances. Per the law’s Section 975, municipal advisers must register with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board. Critics, however, have called the SEC’s proposed definition of what constitutes a municipal adviser as too broad.

The senators’ legislation makes it clear that banks and those that work for them are not municipal advisers unless they actually take part in municipal adviser activities. It is similar to HR 797, which was proposed by US Representatives Gwen Moore (D-Wis.) and Steve Stivers (R-Ohio) earlier this year.

The House of Representatives has passed a bill that narrows the definition of a municipal advisor. HR 2827 also exempts certain market participants from being subject to certain rules and says that under Dodd-Frank Section 975 already regulated entities are not municipal advisors. This bill comes after the SEC proposed its own definition of municipal advisor two years ago that some considered too inclusive and/or not in line with Congress’s intent.

In an effort to get wide bipartisan support, Rep. Robert Dold (R-Ill) and Rep. Gwen Moore (D-Wis.) modified the legislation and put back in the federal fiduciary standard for municipal advisers that ha been taken out. Democrats had expressed worry that getting rid of the uniform federal standard might reduce the strength of oversight on the industry. The bill also no longer has “blanket exemptions” to its definition of a municipal advisor, including the categorical language stating that broker-dealers, banks, and municipal securities dealers are not municipal advisors. However, per the House Financial Services Committee, which unanimously approved the bill earlier this month, if such entities were to only take part in certain activities, they would still not be included in the definition.

The bill passed the committee with an amendment by Rep. Barney Frank (D-Mass.) that would take out the language that defines a municipal advisor as someone “engaged … in writing” to give a municipality advice. He believed the wording might have set up a possible loophole from municipal advisor regulation by letting parties not have a written contract. The municipal adviser definition, however, would still include those that “engaged … for compensation.” Also moving forward to the House with the bill was an amendment by Dold letting persons “associated” with a municipal advisory firm to not have to individually register with the SEC. Dold said that the Commission had requested this.

State auditor Crit Luallen is accusing the Kentucky Workers’ Compensation Funding Commission of breaking the law when, rather than seeking financial advice from the Kentucky Finance and Administration Cabinet’s Office of Fiscal Management, it paid Morgan Stanley Smith Barney for private financial advice. Luallen contends that the workers’ compensation agency has paid the broker-dealer about $510,000 for help received in making investments since 1999. The funding commission’s board has accepted the audit’s findings and it will only work with state-employed advisers from now on.

The Kentucky Workers’ Compensation Funding Commission oversees over $350 million in assets. It collects over $70 million annually from assessments on employers’ workers’ compensation premiums. The funding commission’s investments suffered $71 million in lost investments during the fiscal years of 2009 and 2008.

There has been no evidence that there were any conflicts of interest between Morgan Stanley and the funding commission. The broker-dealer is defending its handling of the agency’s investments. Morgan Stanley senior vice president Frank Thompson says the firm did an “outstanding job” and that it strongly recommended that the funding commission not work with the state’s OFM, which it said proposed poor investments.

Related Web Resources:
Agency ignored law, spent $510,000 on financial advice, Kentucky.com, February 20, 2011

Kentucky Workers’ Compensation Panel Criticized Over Outside Adviser, Insurance Journal, February 22, 2011

Kentucky Workers’ Compensation Funding

Kentucky Finance and Administration Cabinet’s Office of Fiscal Management

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The Municipal Securities Rulemaking Board is currently asking for public comment on several rulemaking proposals and draft interpretive guidance, including the proposed Rule G-36, a new fiduciary duty rule for municipal advisors. Comment is also being sought on proposed rule amendments and guidances related to gifts by municipal advisors and fair practice duties of underwriters.

Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is extending the MSRB’s authority to municipal advisors. Under Section 975, municipal advisors have a federal fiduciary duty to clients. MSRB has been directed to implement this requirement. Our institutional investment fraud lawyers would like to remind investors that breach of duty by investment advisers and brokers can be grounds for a securities fraud case when investor losses result.

The draft interpretive guidance regarding advisors’ fiduciary duty address a number of issues, including duty of care, conflicts of interest disclosures, and when conflicts of interest can be waived by a client’s informed consent. The proposed guidance would require municipal advisors to have a fiduciary duty to clients under federal law—not just a fiduciary duty under state and common laws.

The MSRB is also asking for public comment on draft interpretive guidance related to the extension of Rule G-17 to municipal advisors. Also called the “fair dealing” rule, Rule G-17 specifies a code of conduct for all individuals and entities that the MSRB regulates. The draft guidance gives details about how the rule applies to municipal advisers. The MSRB also wants public comment on interpretive guidance of Rule G-17 to underwriters. Both municipal advisers and underwriters would be required to disclose material terms, proposed transaction risks, and related conflicts and incentives to clients.

Related Web Resources:
MSRB, in ‘Coming Weeks,’ to Seek Comment On Rule Proposals, Draft Interpretive Notices, BNA/Broker Dealer Compliance Report, February 2, 2011

MSRB Looking at Pension Disclosure, Bond Buyer, January 31, 2011

Municipal Securities Rulemaking Board

More Blog Posts:
JPMorgan Chase & Co. CEO Warns Municipal Bond Investors to Expect More Bankruptcies, Institutional Investor Securities Blo, January 18, 2011

Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives, Institutional Investor Securities Blog, December 31, 2010

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits, Institutional Investor Securities Blog, December 16, 2010

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