Yesterday the SEC announced its first enforcement proceeding for breach of the fiduciary duty for municipal advisors created by the 2010 Dodd-Frank Act.
The SEC issued a cease and desist order alleging that Kansas-based Central States Capital Markets, its CEO, and two employees breached their fiduciary duty to a municipal client by failing to disclose a conflict of interest. In particular, the SEC alleged that while Central States served as a municipal advisor on municipal bond offerings in 2011, the employees, in consultation with the CEO, arranged for a broker-dealer where all three worked to underwrite the offerings. None of the three men disclosed to the municipal client their relationship to the underwriter or the financial benefit they stood to gain from serving in both roles.
In a press release, Jessica Kane, Director of the SEC’s Office of Municipal Securities, said:
As fiduciaries, municipal advisors must identify and address all material conflicts of interest by eliminating or disclosing such conflicts. Municipal entities rely on the advice of their municipal advisors and must feel confident that those advisors are working in the municipal entity’s best interests.
Without admitting or denying the findings, Central States, the two employees, and the CEO consented to the SEC’s order that they cease and desist from similar future securities-law violations and violations of Rule G-17 of the Municipal Securities Rulemaking Board (MSRB) that requires advisors to deal fairly with their clients. The individuals also agreed to cease and desist from future violations of MSRB Rule G-23 that bars those acting as municipal advisors on a bond offering from underwriting that offering.
Central States will pay $289,827.80 in disgorgement and interest in addition to an $85,000 civil penalty. The two employees will pay civil penalties and will be barred from the financial services industry for a period of time yet to be determined. The CEO will pay a civil penalty and will serve a six-month suspension from acting in a supervisory capacity with any broker-dealer, investment adviser, or municipal advisor.