SEC charges municipal advisor with enforcement action, under powers of Dodd-Frank amendments, for misleading a school district issuer



May 23, 2018

Securities Litigation Alert

Author(s): Stephen M. LaRose, Charles Dell'Anno

On May 9, 2018, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) brought an enforcement action against a municipal advisor based on the advisor’s false and misleading statements about prior experience and failure to disclose a conflict of interest to a school district municipal issuer. The SEC, enforcing post-Dodd-Frank regulations of municipal advisors, seeks to bar the municipal advisor from the securities industry.

Background

Mario Hinojosa (“Hinojosa”) was the sole owner and employee of Barcelona Strategies, LLC (“Barcelona”). Barcelona was a registered municipal advisor and Hinojosa was an associated person, engaging in municipal advisory activities on Barcelona’s behalf. Municipal advisors often perform a series of functions, providing advice to governmental entities seeking to raise financing.

According to the SEC’s Consent Order, Hinojosa had no experience as a municipal advisor when he formed Barcelona. Rather, prior to and throughout the time period when Barcelona was a registered municipal advisor, Hinojosa was employed as a paralegal by the law firm of a Texas State Representative. The law firm for which Hinojosa worked acted as bond counsel to the La Joya (TX) Independent School District (the “District”) for three bond offerings between 2013 and 2014. The District also retained Barcelona to act as a municipal advisor on the same three bond offerings, for which the District paid Barcelona $386,876.52 in fees.

According to the SEC’s Consent Order, before the District retained Barcelona, Hinojosa represented to the District that Barcelona’s “professionals” had participated in numerous bond offerings and that Hinojosa himself had over four years of municipal finance experience—without mentioning that Hinojosa was the only “professional” and his experience was limited to his paralegal services while working at the law firm. In addition, Hinojosa did not disclose to the District his employment relationship with the law firm, which was acting as bond counsel on the same transactions.

The SEC’s claims

On May 9, 2018, the SEC brought an enforcement action against Hinojosa and Barcelona in an administrative agency proceeding, contending that the representations about his prior experience were false and misleading, and that they breached their fiduciary duty to the District by failing to disclose Hinojosa’s conflict of interest related to the bond counsel law firm. The enforcement action included claims under Section 15B(a)(5) and Section 15(c)(1) of the Securities Exchange Act of 1934, as amended by the Dodd-Frank Act. Hinojosa and Barcelona entered into a consent order, agreeing for settlement purposes to the SEC’s claims and allegations.

After the passage of Dodd-Frank in 2010, Section 15B(a)(5)[1] prohibits any municipal advisor from engaging in any “fraudulent, deceptive, or manipulative act or practice” in connection with a municipal offering. And Section 15B(c)(1)[2] imposes a statutory fiduciary duty on a municipal advisor owed to a municipal entity for whom the advisor is engaged to act as such. Section 15B(c)(1) goes on to prohibit any act, practice, or course of business that is either inconsistent with that fiduciary duty, or that violates any rule of the Municipal Securities Rulemaking Board (“MSRB”). One such rule of the MSRB is Rule G-17, which was amended after Dodd-Frank to apply to municipal advisors. Rule G-17 generally requires fair dealing with all persons and prohibits any deceptive, dishonest, or unfair practice.

Based on these violations, the Consent Order requires Barcelona and Hinojosa to disgorge fees earned in connection with the bond offerings and bars Hinojosa from associating with the securities industry in any capacity.

Lessons for municipal participants

The SEC’s enforcement action stems from its enhanced powers over municipal bond issuances under the Dodd-Frank Act. Prior to the passage of the Dodd-Frank Act in 2010, municipal advisors were unregistered and largely unregulated. But the Dodd-Frank Act amendments and directives brought the municipal advisory industry into the regulatory light, and into the focus of the Commission’s enforcement division.

While the conduct of the actors here appears to be out of the ordinary and extreme, all municipal advisors should ensure that they are in full compliance with the SEC’s regulatory obligations. A recent Risk Alert issued by the Commission on November 7, 2017, warned that SEC examiners frequently observed deficiencies related to municipal advisor compliance with new regulatory obligations, such as registration, recordkeeping, and supervision.[3] Those deficiencies caused some firms to be referred to the Commission’s Division of Enforcement.

Furthermore, municipal advisors should be mindful of their statutory fiduciary duty to municipal entities and all applicable MSRB rules, including Rule G-17, which imposes an affirmative duty to deal fairly with all persons.

Meeting these obligations is of critical importance to advisors, since failure to do so can in certain circumstances result in a disgorgement of fees and other various penalties.


  1. 15 U.S.C. § 78o-4(a)(5)
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  2. 15 U.S.C. § 78o-4(c)(1)
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  3. Observations from Municipal Advisor Examinations, Nov. 7, 2017, https://www.sec.gov/files/observations-from-municipal-advisor-examinations.pdf
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