First SEC Case Re Dodd-Frank Municipal Fiduciary Duty Provision
The Commission brought its first action based on Exchange Act Section 15B(c)(1) as amended by Section 275 of Dodd-Frank. Under that provision municipal advisors and their associated persons have a fiduciary duty to their municipal entity clients and are prohibited from participating in any act which is not consistent with their fiduciary duty. In the Matter of Central States Capital Markets, LLC, Adm. Proc. File No. 3-17170 (March 14, 2016).
Central States is registered with the SEC as a municipal advisor, broker-dealer and investment adviser. It was also registered with the state of Missouri as a broker-dealer. Respondents Mark Detter, David Malone and John Stepp are executives at Central States.
Mr. Stepp first became associated with Broker-Dealer in 2008. In 2009 he brought Messrs. Detter and Malone to the firm. The three men provided municipal advisory and municipal underwriting services to municipal entity clients.
In August 2010 Mr. Stepp formed Central States with the intention of separating from Broker-Dealer and taking the municipal advisory and underwriting business he managed with him to the new entity. The firm became a registered municipal advisor with the MSRB. In 2011 Mr. Stepp hired Messrs. Detter and Malone – they joined Central States. The three men remained with Broker-Dealer under Independent Representatives Agreements.
In April 2011 City Council approved an advisory agreement with Central States. Between May and September 2011 the City issued two sets of Temporary Improvement Notes and one set of General Obligation Refunding Bonds. Central States acted as municipal advisor for each offering. As part of its services Messrs. Detter and Malone also procured underwriting services for the three City offerings. Although Broker-Dealer was nominally listed as the underwriter, the associated persons of the Broker-Dealer who furnished those services were full time employees of Central States.
Messrs. Detter and Malone did not disclose the dual role of certain Central States employees when drafting the official statements and offering circulars for the three offerings. The documents stated only that Broker-Dealer was the underwriter and Central States the municipal adviser. The Order alleges violations of Exchange 15B(c)(1) and certain MSRB Rules.
To resolve the action each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and MSRB Rule G-17 (failure to disclose certain conflicts). The order as to each individual also included MSRB Rule G-23 (prohibits serving as financial adviser and underwriter at same time). The firm was censured. In addition, the firm will pay disgorgement of $251,650, prejudgment interest and a penalty of $85,000. Messrs. Detter and Malone were each barred from association with a broker-dealer and from association with an investment adviser with a right to apply for re-entry after, respectively, two years and one year. Mr. Stepp is subject to a similar prohibition for six months. Finally, Messrs. Detter, Malone and Stepp will each pay a penalty in the amount of, respectively $25,000, $20,000 and $17,500.