SEC exams to focus on MAs, T+1 settlement cycle in FY 2025

The Securities and Exchange Commission’s Examination Division will take a closer look at municipal advisors, specifically non-solicitor municipal advisors in FY 2025, and will begin enforcing the move to a T+1 settlement cycle.

That comes on the backs of the Commission’s first case enforcing Municipal Securities Rulemaking Board Rule G-42, which was established in 2016 but had yet to be tested in court until this year.

“The Division will continue to examine whether municipal advisors have met their fiduciary duty to municipal entity clients when engaging in municipal advisory activities, such as providing advice or recommendations regarding the pricing or method of sale with respect to the issuance of municipal securities,” the SEC said in its 22 page report. “The Division will also continue to examine whether municipal advisors have complied with MSRB Rule G-42, which establishes the core standards of conduct and duties applicable to non-solicitor municipal advisors, including requirements to disclose conflicts of interest and to document municipal advisory relationships.”

“Finally, the Division will continue to assess whether municipal advisors have made required filings with the Commission and met their professional qualification, recordkeeping, and supervision requirements,” the SEC said.

The SEC’s focus on municipal advisors also comes as many have warned of the increase in unregistered municipal advisory activity, especially since the onset of the pandemic. Market participants have said that they sometimes witness independent “consultants” acting as muni advisors without registering with the SEC as required by federal law, and SEC officials have warned that advisors on the outskirts of the muni market need to be sure they aren’t crossing the line, or to be registered if they do.

The Commission will also begin enforcing the move to a T+1 settlement cycle, following the switch in May. The priorities don’t mention the MSRB Rules G-12 on uniform practices and G-15 on confirmation, clearance and settlement; the MSRB’s rules intended to bring the municipal securities market in line with the changes the SEC brought on equities.

“The Division will evaluate broker-dealer compliance with Rule 15c6-1 under the Exchange Act, which reduced the standard settlement cycle for most securities to the day after trade date (T+1), and with Rule 15c6-2 under the Exchange Act, which requires broker-dealers engaging in the allocation, confirmation, or affirmation process to have written agreements or written procedures reasonably designed to ensure completion of the process as soon as practicable and no later than the end of day on trade date (T+0).”

The SEC will also begin looking at advisors’ amended books and records in accordance with T+1 and will considers “operational changes, or impacts related to adviser facilitation of institutional transactions that are involved in the allocation, confirmation, or affirmation processes subject to Rule 15c6-2(a),” the SEC said. “In addition, examinations will assess registrant technology changes associated with shortening of the settlement cycle and evaluate any areas that need further attention and resources, such as specific products or counterparties that are routinely not settling within the required time frames.”

The Commission will also continue to look at some of the emerging technologies of the day, such as artificial intelligence, AI capabilities and assess the accuracy of AI use.

“As technology continues to transform investing, we must work to identify new and emerging risks,” the SEC said. “The Division must constantly scan the horizon and stand ready to examine registered firms for compliance with SEC rules tied to these risks.”