SEC Settles Charges against Municipal Advisors for Deceptive Practices in California School Districts

The SEC settled charges against two municipal advisory firms and their executives for the use of deceptive practices when soliciting business in five California school districts. The case marks the first enforcement action by the SEC under the municipal antifraud provisions of Dodd-Frank Act.

The SEC Order stated that the first firm was retained by the second during the time period in which the first firm advised members of the school districts about their hiring process for financial professionals. The SEC Order determined that the first firm shared confidential information with the second firm, that included: (i) specific questions to be asked during its interviews with the school districts, and (ii) the details of competitors' proposals, not excluding their fees. Because the school districts were unaware that the second firm knew these confidential details, the SEC argued, the means by which the second firm won the municipal advisory contracts proved deceptive.

The first firm agreed to a censure and a $30,000 penalty, while the second firm agreed to a censure and a $100,000 penalty. The second firm's principals also agreed to pay penalties of $30,000 and $20,000, respectively.