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The Biggest Pitfall for Municipal Advisors to Avoid When Preparing for SEC Examinations

preparing for SEC examinations

Early in October, at the National Association of Municipal Advisors Conference, two attorneys with the Office of Compliance Inspections and Examinations ("OCIE") told the municipal advisors in attendance that many need to work on improving compliance procedures.

To ensure that municipal advisors are improving their compliance procedures, the Securities and Exchange Commission ("SEC") expects to conduct more examinations in the new year.

One of the biggest issues that the attorneys discussed at the conference was that many firms had written policies and procedures, but not all employees were aware of or familiar with the procedures. Having an established supervisory system, with written supervisory procedures ("WSPs") "reasonably designed to ensure" compliance is required by the Municipal Securities Rulemaking Board, Rule G-44.

In an effort to be compliant with that rule, many municipal advisory firms opt to work with a third-party consultant to help design their compliance programs.

Selecting the right third party consultant is vitally important.

A major issue that firms utilizing third-party consultants encountered was that the consultants did not always provide written policies and procedures tailored to the activities of the business. An anecdote shared by one attorney at the conference included one firm who had such an issue with WSPs that didn't match their business activities. When questioned about it, the firm "admitted that they found it a bit odd but trusted in the expertise of their consultant."

This resulted, naturally, in the firm being written up.

Municipal advisory firms are still responsible for the WSPs that they or third-party consultants create. The WSPs should be customized to the firm's business activities, and employees of the municipal advisor need to be familiar with the procedures.

It's not an issue to use the services of a third-party consultant, but that consultant needs to be focusing on exactly what your firm does. You can't squeak by with a generic policies and procedures manual that a consulting agency prepared for firms that are sort of similar to your own - it needs to be customized to your firm.

Why Customized WSPs Are So Important :

While it's convenient, and easy, for a third-party consultant to just hand your firm a general WSP manual, it's not likely to stand up during an OCIE exam.

It is not enough to simply copy MSRB Rule, like Rule G-42 regarding the duties on non-solicitor municipal advisors, into WSPs. Without a detailed explanation on how a firm plans to comply with the applicable rules, WSPs will be incomplete Your firm needs to be able to articulate how it will comply with the rule.

Additionally, without clear procedures in place that your entire firm understands, some muddling of business and personal financial matters may occur. If that happens, then the OCIE will expect personal records handed over along with business records. You can avoid this through proper WSPs - something that a quality third-party consulting firm can help you prepare.

Written supervisory procedures need to be tailored to your business to cover the specifics of things such as disclosures of conflicts of interest, limitations on gifts and political contributions , business continuity, and more.

Different needs for different stages of business:

For advisers just forming, it's important to get started on the right foot. That's where utilizing the services of a specialized attorney is distinctly needed: forming your advisory business is a significant investment. It's essential to work with securities lawyers that will both simplify the formation process, and ensure it is done the right way from day one.

Firms that have been around for years will still need guidance on the development, implementation, and maintenance of their compliance programs, as the OCIE attorneys clearly described in their session at the National Association of Municipal Advisors Conference.

Each year, your plans need to be reviewed. Chances are, sooner or later, your firm will be examined by the OCEI or the SEC.

You need to be prepared, and you need attorneys on your side that know your business.

If you're looking for a law firm to help you prepare, the team at Jacko Law Group, PC is here to help. To schedule time to talk through your municipal advisor needs, click here.

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