SEC wins in first ever Rule G-42 enforcement

The Securities and Exchange Commission has won its first ever case enforcing Municipal Securities Rulemaking Board Rule G-42 on the duties of non-solicitor municipal advisors after a federal judge in U.S. District Court for the Southern District of California granted partial summary judgment against Choice Advisors and its principal Matthias O’Meara.

The court found that Choice and O’Meara breached their fiduciary duty by acting as an unregistered securities dealer and for failing to disclose it. The court also found that O’Meara breached his fiduciary duty and was in violation of MSRB Rule G-42 for participating in a fee-splitting agreement by being simultaneously employed by both Choice Advisors and his previous underwriting firm BB&T Securities. Choice and O’Meara also violated MSRB Rule G-17 on fair dealing.

O’Meara’s co-principal Paula Permenter was also charged in 2021 and without admitting or denying the findings, agreed to settle the charges.

Both O’Meara and Permenter were registered as brokers with BB&T until 2018 when they left the firm to start Choice. 

“Before O’Meara left BB&T, he negotiated a deal with the bank: for every school that O’Meara brought to the bank for underwriting, BB&T would split its underwriter’s fee with O’Meara and Choice,” the decision said. “During his last two weeks at BB&T, O’Meara not only negotiated the above fee-splitting arrangement, but also worked for the bank as an underwriter and for the schools as their municipal advisor.”

O’Meara not only reached an agreement with BB&T on the fee arrangement with regards to Bella Mente and Liberty Tree, first-time issuers that solicited his services, but he also planned to use the arrangement for three other schools.

MSRB Rule G-42 was established in 2016 but had yet to be tested in court. Standards of conduct for municipal advisors are still evolving. In a different case, the SEC recently won against municipal advisors for failing to disclose that their contingent fee arrangement creates a conflict of interest.

Before this partial summary judgment victory for the Commission, O’Meara attempted to dismiss the case, arguing that the SEC was using the action to “test drive” a rule it didn’t properly define and that allegations of a failure to disclose the fee-splitting arrangement were without merit due to “fee splitting” not being clearly defined in the MSRB rule.

Choice Advisors and Matthias O’Meara did not respond to requests for comment for this story.