The SEC charged Kansas-based Central States Capital Markets, its CEO, and two employees for breaching their fiduciary duty by failing to disclose a conflict of interest to a municipal client. The case is the SEC’s first to enforce the fiduciary duty for municipal advisors created by the 2010 Dodd-Frank Act, which requires these advisors to put their municipal clients’ interests ahead of their own.
According to the SEC’s order, while Central States served as a municipal advisor to a client on municipal bond offerings in 2011, two of its employees, in consultation with the CEO, arranged for the offerings to be underwritten by a broker-dealer where all three worked as registered representatives. The order found that Central States CEO John Stepp and employees Mark Detter and David Malone did not inform the client, identified in the order as “the City,” of their relationship to the underwriter or the financial benefit they obtained from serving in dual roles.
“By failing to disclose their financial interest in the underwriting of the City’s offerings, Central States — the City’s municipal advisor — and its employees deprived the City of the opportunity to seek unbiased financial advice,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “A municipal advisor’s first duty should be to its municipal client, not its own bottom line.
Without admitting or denying the findings, Central States, Detter, Malone, and Stepp consented to the SEC’s order that they cease and desist from similar future securities-law violations and violations of Rule G-17 of the Municipal Securities Rulemaking Board (MSRB) that requires advisors to deal fairly with their clients. Detter, Malone, and Stepp also agreed to cease and desist from future violations of MSRB Rule G-23 that bars those acting as municipal advisors on a bond offering from underwriting that offering.