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March 22‚ 2012
SEC Focuses On Municipal Underwriter Compliance
With Due Diligence Obligations
By Len Weiser-Varon
On March 19, the SEC’s Office of Compliance Inspections and
Examinations released a National Examination Risk Alert
reporting on its examinations of broker-dealers for compliance with
municipal bond underwriter due diligence obligations under the SEC’s prior
interpretive releases and under SEC Rule 15c2-12.
The release of the Risk Alert dovetails with remarks made by
SEC officials at recent municipal bond conferences to the effect that the
SEC is ramping up its enforcement-related reviews of municipal bond
underwriters’ due diligence practices.
Findings in the Risk Alert include:
·
The compliance examinations revealed instances where underwriters
neither maintained nor had policies requiring the maintenance of written
documentation regarding due diligence efforts. The Risk Alert notes that some underwriters asserted that it is not
industry practice to maintain such written records and that their
outside counsel had recommended that such records not be maintained.
The Risk Alert states that such a practice of intentional non-documentation
makes it difficult for underwriters to demonstrate that they have complied
with their due diligence obligations and their supervisory obligations
relating to conduct of due diligence. The Risk Alert indicates that “[t]his
approach might lead to lax due diligence practices at a time when there are
growing concerns over the fiscal well-being of some municipalities.”
·
The Risk Alert identified examples of certain practices used by
certain underwriters that “evidence some due diligence and supervisory
review” and that could assist underwriters in compliance/ enforcement
examinations regarding whether and how they are meeting their due diligence
obligations:
o detailed
written policies and procedures addressing the nature of due diligence
requirements under Rule 15c2-12 and the firm’s expectations as to how its
personnel can develop the reasonable belief in the truthfulness and completeness
of key representations in an offering document required under SEC
interpretive guidance;
o senior
level “commitment committees” that review and approve categories of
underwritten deals, including review of due diligence memoranda describing
diligence calls and documentary due diligence, and, for categories of
transactions that are exempted from committee review based on ratings or
recent prior review by the committee of a transaction involving the same
issuer, review of such memoranda by the committee chairman or another
committee member;
o firm-developed
diligence checklists, which may include narrative responses relating to
past familiarity with the issuer and other factors relevant to the requisite
reasonable belief relating to the offering document;
o due
diligence memoranda prepared by bankers detailing the subjects discussed in
due diligence calls, issues noted and how such issues were resolved;
o outlines
for diligence calls prepared by counsel;
o records
regarding on-site examination activities such as site visits, discussions
with issuer personnel and examinations of issuer records and forecasts; and
o
recordkeeping checklists that assist personnel in generating and preserving
due diligence documentation.
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