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From Securities Regulation Daily, August 19, 2014

SEC announces plans to inspect newly registered municipal advisors

By Jacquelyn Lumb

The SEC’s Office of Compliance Inspections and Examinations (OCIE), has sent a letter to the heads of newly registered municipal advisors to inform them about its upcoming inspection plans. The focused, risk-based examinations of municipal advisors will occur over the next two years during which the staff will look for compliance with the municipal advisor rules that took effect July 1, 2014. OCIE also will examine for compliance with the applicable MSRB rules once they are approved by the SEC and go into effect.

Exam initiative. The SEC’s rules that went into effect in July require advisors to register with the SEC using the EDGAR system during a four-month phase-in period than ends October 31. According to the SEC’s news release announcing the exam initiative, the staff plans to examine a significant percentage of these advisors. The areas that will be targeted include compliance with the advisor’s fiduciary duty to its municipal entity clients, the books and recordkeeping obligations, disclosure, fair dealing, supervision, and employee qualifications and training. The SEC is working with the MSRB and FINRA to develop a coordinated approach to the oversight of municipal advisors.

The initiative will occur in three phases, according to the letters that were sent out today—engagement, examination, and informing policy. The letters include resources for municipal advisors to learn about the relevant laws, rules, staff guidance and interpretive letters. OCIE also reported plans to hold a compliance outreach program later this year in coordination with the MSRB and FINRA.

Examination phase. During the examination phase, the staff will determine whether municipal advisors are complying with the SEC and MSRB registration rules. Examiners will evaluate municipal advisors’ compliance with the fiduciary duty requirements in the Dodd-Frank Act and SEC and MSRB rules. In exercising their fiduciary duty, fiduciaries must act honestly and in the best interest of the client without regard to their own interests, and must provide full and fair disclosure about material facts and any conflicts of interest.

The examiners will assess the accuracy of the disclosures made to municipalities and consider whether any advisors are engaging in deceptive, dishonest or unfair practices. The examiners also will evaluate whether the advisors have policies, procedures and controls for supervising their business, and whether they have created and maintained the books and records that are required by the SEC and the MSRB. In addition, the examiners will assess the knowledge of the staff and the training that is provided.

Once the examination phase is completed, the staff will issue a report on its observations. The report may address areas that were identified as high risk, industry trends or significant issues.

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