SEC Director Red Flags Unregistered Muni Advisors Engaging in Public-Private Financing Arrangements

Director of the SEC's Office of Municipal Securities Dave Sanchez warned state and local government officials about unregistered municipal advisors engaging in public-private partnership ("P3") infrastructure project financing arrangements.

During The Bond Buyer Infrastructure Conference, Mr. Sanchez highlighted the risks of P3 arrangements, which can expose public entities to long-term financial liabilities if not structured carefully. He pointed out concerning behaviors of some P3 consultants, including advisors, developers and financial intermediaries, who may be engaging in municipal advisory activities without proper registration.

Mr. Sanchez raised specific concerns about:

• Unregistered Municipal Advisors. Mr. Sanchez said that unregistered consultants are advising municipalities on the structure and financing of large-scale infrastructure projects, such as transportation, energy and affordable housing. He reminded attendees that failure to register constitutes a violation of the Securities Exchange Act and can lead to significant financial and reputational consequences.
• Complex P3 Financing Structures. Mr. Sanchez warned of the complexity of financing structures involving a mix of public and private financing. He said these structures may include inappropriate risk transfers, hidden long-term liabilities and inflated project costs, which could expose public entities to financial burdens far beyond the initial agreements.
• Conflicts of Interest Among P3 Consultants. Mr. Sanchez cited reports that show that P3 consultants may be skewing project costs in favor of P3s, failing to provide transparency or to include proper public sector comparators. He said that these actions could mislead municipalities into pursuing expensive or ill-advised projects.
• Unsolicited Proposals and Municipal Advisory Rules. Mr. Sanchez warned of the increasing use of unsolicited proposals by P3 consultants to initiate infrastructure projects. He noted that while formal RFP/Q processes might be exempt from municipal advisory regulations, unsolicited proposals that include tailored advice could be deemed municipal advisory activity, requiring registration.

Mr. Sanchez urged municipal entities to be proactive in verifying the registration status of their advisors. He stressed the importance of maintaining proper oversight throughout the lifecycle of P3 projects.