SEC Charges Firm and Two Principals in First-Ever Actions Enforcing Rule on Duties of Municipal Advisors
- Written by Newsfile
Washington, D.C.--(Newsfile Corp. - September 23, 2021) - The Securities and Exchange Commission today charged a Texas- and Colorado-based municipal advisor, Choice Advisors LLC, and its two principals, Matthias O'Meara and Paula Permenter, with violating their duties, engaging in unregistered municipal advisory activities, and related misconduct with respect to Choice's charter school clients. The actions are the first-ever SEC cases enforcing Municipal Securities Rulemaking Board Rule G-42 on the duties of non-solicitor municipal advisors.
The SEC's complaint alleges that, in May 2018, O'Meara and Permenter left their employment at a national municipal underwriting firm to start Choice, a new municipal advisor focused on charter schools. According to the SEC's complaint and order, O'Meara and Permenter entered into an impermissible fee-splitting arrangement with their former employer. Such arrangements are prohibited in any offering where the municipal advisor will be providing advice to clients of the underwriter. Moreover, O'Meara and Permenter allegedly did not adequately disclose to their clients the conflicts of interest associated with the illicit arrangement or their relationship with the underwriting firm. The SEC also alleges that Choice, O'Meara, and Permenter unlawfully engaged in municipal advisory activities when they were not registered with the SEC or MSRB.
The SEC's complaint alleges additional misconduct by O'Meara. While still employed at the underwriting firm, O'Meara allegedly improperly operated in a dual capacity, simultaneously serving as a registered representative for the underwriting firm, and also as a municipal advisor where he purported to serve as two clients' fiduciary. As alleged in the complaint, O'Meara took steps to increase the overall fees paid by the clients in a way that would enrich himself and Choice, ultimately costing one school approximately $40,000 in additional fees.
"It is critical that municipal advisors comply with MSRB Rule G-42, which sets forth core standards of conduct, including the disclosure of conflicts," said LeeAnn G. Gaunt, Chief of the SEC Enforcement Division's Public Finance Abuse Unit. "Schools and other municipal entities should be able to trust that municipal advisors are serving their clients' interests and not their own."
The SEC's complaint, filed in U.S. District Court for the Southern District of California, charges Choice and O'Meara with violating the municipal advisor fiduciary duty, deceptive practices, fair dealing, and registration provisions of the federal securities laws, and seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties. Permenter, who agreed to settle with the SEC, consented, without admitting or denying any findings, to the entry of an SEC order finding that she violated rules regarding municipal advisor registration and the duties of non-solicitor municipal advisors, censuring her, ordering her to pay a $26,000 penalty, and requiring that she participate in training on the duties of non-solicitor municipal advisors as well as have her engagement letters reviewed by a third party for a period of one year.
These actions add to a number of recent SEC enforcement[1] actions[2] against[3] municipal[4] advisors[5] who provide services to school clients.
The SEC's investigation was conducted by William T. Salzmann and Joseph Chimienti of the Public Finance Abuse Unit, and was supervised by Jason H. Lee. The SEC's litigation will be led by Andrew Hefty, Sheila O’Callaghan, and Mr. Salzmann. The SEC acknowledges the assistance of the Municipal Securities Rulemaking Board.