The Securities and Exchange Commission (SEC) settled an administrative proceeding against Hamlin Capital Advisors, LLC and its managing director on Oct. 24, 2024, for failing to timely and fully disclose material conflicts of interest to their charter school clients in connection with the issuance of bonds in the aggregate principal amount totaling over $500 million. This is yet another case showing the SEC’s focus on municipal advisory activities and a reminder of the statutory fiduciary duty of municipal advisors to municipal entities, which the SEC has consistently interpreted to include charter schools.

According to the SEC’s file, for almost 4.5 years, Hamlin provided investment advice by contacting charter schools and sending them information on municipal bond offering options. In several of those cases, an entity associated with Hamlin (Related Purchaser) was to be the initial purchaser of all or a substantial amount of the bonds issued, sometimes also collecting a “bondholder representative fee.” Even though the Related Purchaser affiliated with Hamlin and the charter schools had opposing interests in the transaction (i.e., the Related Purchaser had an interest in receiving a higher interest rate and bondholder representative fee, while the charter schools had an interest in a lower interest rate and bondholder representative fee), none of these initial communications mentioned the conflict of interest to the charter schools. Therefore, the SEC concluded Hamlin willfully violated MSRB Rule G-17, which makes it unlawful for a municipal advisor to engage in any “deceptive, dishonest, or unfair practice” in the conduct of its municipal advisory activities, and MSRB Rule G-42, which requires municipal advisors to inform municipal entities of all material conflicts of interest in writing “prior to or upon engaging in municipal advisory activities.”

Hamlin did not disclose this conflict of interest to the charter schools until a few days, weeks, or sometimes months after sending these initial proposals, when it sent its written advisory agreement to the schools. However, this agreement simply stated that the Related Purchaser and Hamlin had common ownership, that Hamlin could propose a financing structure that could result in the Related Purchaser purchasing the securities, and that the Related Purchaser and Hamlin could both receive fees as a result of the transaction. Furthermore, some of these agreements inaccurately described Hamlin’s role in the transaction by including advisory services start dates several months later than when those services actually started or by incorrectly stating that the charter schools had “considered various financing structures and elected to proceed with the financing structure associated with the [b]onds without the assistance of [Hamlin],” none of which was accurate according to the SEC. Consequently, the SEC determined the disclosure did not adequately describe “the nature, implications, and potential consequences” of the conflict of interest between Hamlin and the schools, nor did it include how Hamlin intended to manage or mitigate those diverging financial incentives, and thus did not meet the content requirements of MSRB Rule G-42.

Lastly, the SEC found that Hamlin’s Written Supervisory Procedures, which every municipal advisor is required to have under MSRB Rule G-44, did not cover the advice to municipal entities, such as charter schools, and therefore could not be deemed “reasonably designed to ensure that the conduct of” Hamlin was in compliance with applicable regulations, as required by the rule.

The SEC has charged Hamlin and the managing director with willfully violating MSRB Rule G-17 on fair dealing, Rule G-42 on the duties of non-solicitor municipal advisors, and Section 15B(c)(1) of the Securities Exchange Act prohibiting violations of MSRB Rules. Additionally, the SEC has charged Hamlin with willfully violating Rule G-44 on supervisory and compliance obligations of municipal advisors and Section 15B(c)(1) of the Securities Exchange Act on fiduciary duties of municipal advisors to municipal entities. Hamlin was fined $200,000 and the managing director $75,000 in civil penalties, $85,000 of which will go to the MSRB. Hamlin and the managing director have settled the case without admitting or denying the findings. Nonetheless, this case is a reminder of municipal advisors’ fiduciary duty to their clients, the risks of conflicts of interest when proper supervisory procedures are not in place, and the importance of adequate disclosure.