U.S. District Court Grants SEC Summary Judgment Against Muni Advisor for Conflict of Interest Violations

The U.S. District Court for the Western District of New York granted the SEC partial summary judgment against a New York-based municipal advisor and two of its principals for failing to disclose material conflicts of interest to their clients arising from contingent compensation arrangements.

According to the Litigation Release, the SEC found that the principals (i) failed to disclose to the adviser material conflicts of interest arising from contingent compensation arrangements and (ii) made false written representations to clients stating that the adviser had no undisclosed material conflicts of interest. In its Complaint, the SEC asserted that a municipal advisor has a material conflict of interest when its compensation is contingent on the size or closing of a client’s transaction. 

The Court found that the defendants: (i) breached their fiduciary duty of loyalty to municipal entity clients, in violation of Exchange Act Section 15B(c)(1) ("Municipal securities") and MSRB Rule G-42 ("Duties of Non-Solicitor Municipal Advisors"); (ii) failed to provide their clients full and fair disclosure of material conflicts of interest in violation of MSRB Rule G-42; (iii) failed to deal fairly with clients and engaged in a deceptive, dishonest or unfair practice in violation of MSRB Rule G-17 ("Conduct of Municipal Securities and Municipal Advisory Activities"); (iv) failed to establish WSPs to supervise municipal activities and its associated persons reasonable designed to achieve compliance with securities laws in violation of MSRB Rule G-44 ("Supervisory and Compliance Obligations of Municipal Advisors"); and (v) engaged in municipal advisory activity in contravention of any MSRB rule in violations of Exchange Act Section 15B(c)(1). The Court denied the defendants’ motion for summary judgment on the same claims.