SEC Brings First Action under Dodd-Frank Municipal Advisor Antifraud Rules
Two California-based municipal advisory firms and their executives have agreed to settle SEC charges that they used deceptive practices when soliciting the business of five California school districts.
According to the SEC, an investigation found that School Business Consulting Inc. was advising certain school districts about their hiring process for financial professionals. School Business Consulting was simultaneously retained by Keygent LLC, which was seeking the municipal advisory business of the same school districts. The SEC stated without permission, School Business Consulting shared confidential information with Keygent, including questions to be asked in Keygent’s interviews with the school districts and details of competitors’ proposals including their fees. The SEC said the school districts were unaware that Keygent had the benefit of these confidential details throughout the hiring process. Keygent ultimately won the municipal advisory contracts.
This is the SEC’s first enforcement action under the municipal advisor antifraud provisions of the Dodd-Frank Act. Municipal Securities Rulemaking Board (“MSRB”) Rule G-17 states that, in the conduct of its municipal securities or municipal advisory activities, each broker, dealer, municipal securities dealer, and municipal advisor shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice. Section 15B(c)(1) of the Exchange Act requires that municipal advisors shall not act in contravention to any MSRB rule in the provision of advice to or on behalf of a municipal entity, or in undertaking a solicitation of a municipal entity.
School Business Consulting was also charged with failing to register as a municipal advisor. According to the SEC, School Business Consulting was engaged in the “solicitation of a municipal entity” as that term is defined in Section 15B(e)(9) of the Exchange Act because it received direct compensation from Keygent and the solicitation of school districts on behalf of Keygent was for the “purpose of obtaining or retaining an engagement . . . in connection with . . . the issuance of municipal securities.” Accordingly, the SEC found School Business Consulting should have registered as a municipal advisor pursuant to Section 15B(a)(1)(B) of the Exchange Act from the time it began soliciting for Keygent.
The respondents in the SEC actions did not admit or deny the SEC’s findings.
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