Template Policies, Poor Docs Are Top Muni-Exam Flaws

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By Antoinette Gartrell

Feb. 3 — “Templated” supervisory procedures and inconsistent documentation are among the top deficiencies being seen in municipal advisor examinations, Securities and Exchange Commission and Financial Industry Regulatory Authority examiners said.

Written supervisory procedures (WSP) are often not tailored to the firms' business model, and supporting documentation is often missing analysis on pricing and deal comparables, SEC examiner Robert Hartman said Feb. 3 at the 2016 Compliance Outreach Program for Municipal Advisors. There needs to be a paper trail to support pricing and also an analysis of how the ultimate outcome was reached, he said.

The SEC's municipal advisor exam initiative, launched in 2014, comprises three phases: engagement; examination; and informing policy. During the examination phase, FINRA and the SEC focus on seven target areas: registration, fiduciary duties, disclosures, fair dealing, supervision, training and qualifications, books and records..

The outreach program—hosted by the SEC, FINRA and the Municipal Securities Rulemaking Board—came just a few weeks after the SEC approved new MSRB Rule G-42, which clarifies the fiduciary duty that municipal advisors owe to their clients and imposes core standards for the industry .

Deficiency Trends

WSP deficiencies tend to occur with smaller shops that hire third parties. Some firms use voluminous templated procedures and don't tailor them to their business activities and size, SEC staff accountant Cesar Davis said. Other firms just use the rule language, which makes it much more difficult to review during examination, Davis said.

Steve Kach, examination manager for FINRA's Philadelphia district office, added that faulty retention of e-mail and other electronic communications is still a relatively common finding on exams. Some firms don't have adequate procedures to identify a municipal entity client and in some cases aren't aware that it needs to be done, Kach said.

FINRA panelists also said that some firms don't adequately document their advice and recommendations. Kach reminded the gathering that a little less than 150 FINRA members are municipal advisors, leaving about 97 percent that aren't. As a consequence, firms that aren't municipal underwriters but offer investment advice to institutional clients that also happen to be municipal entities, may be less aware of the new requirements.

Other deficiencies include co-mingling business bank accounts with personal use. Such practices make it challenging to track business activities, Hartman said. Having an audit trail is crucial, he added.


In the future, municipal advisors should be paying more attention to cybersecurity and how it's implemented relative to their business model, Hartman said. They also should be aware that new rules on gifts and gratuities are coming into play.

To contact the reporter on this story: Antoinette Gartrell in Washington at agartrell@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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