Adviser Failed to Disclose Connection to Broker-Dealer
A municipal adviser and its principals agreed to pay over $400,000 in fines, disgorgement, and interest for failing to disclose that they and other employees worked for the underwriter they recommended. According to the SEC, a municipal client engaged the respondents for advisory work which included recommending a bond underwriter. The SEC alleges that the respondents retained an affiliated broker-dealer without a competitive bidding process in violation of their fiduciary duty, imposed by the Dodd-Frank Act. The SEC faults the firm for failing to disclose that they, and several employees, were associated persons of the underwriter and, thereby, had a financial incentive in the bond offerings. The individuals were fined and barred from the industry. The SEC explains that it is “well settled that fiduciaries must act in utmost good faith, use reasonable care to avoid misleading clients, and fully and fairly disclose conflicts of interest.”
OUR TAKE: Notably, the SEC does not allege that the municipality was harmed in any way e.g. that it paid high underwriting fees or that the bond offerings were deficient. The mere conflict of interest, even in the absence of client harm, can result in significant regulatory penalties.