CHICAGO — Underwriters must conduct thorough due-diligence, checking issuers’ official statements and continuing disclosure agreements for completeness and accuracy, prior to underwriting their bonds, a Securities and Exchange Commission official warned lawyers here.
Speaking at a regulatory session at the National Association of Bond Lawyers’ Bond Attorney’s Workshop on Wednesday, Mary Simpkins, senior counsel in the SEC’s municipal securities office, also urged lawyers — many of whom serve as underwriter’s counsel — to encourage underwriters to review a risk alert the commission issued in March detailing those due-diligence obligations.
Simpkins said her comments were her own, and were not necessarily shared by the SEC or its staff.
She said inspectors with the SEC’s office of compliance inspections and examinations and the Financial Industry Regulatory Authority are “out there … checking for evidence of compliance.”
The SEC risk alert reviews underwriters’ obligations under Rule 15c2-12 on disclosure and the Municipal Securities Rulemaking Board’s Rule G-27 on supervision, because inspectors found that some firms had insufficient procedures.
“They put it out because they noticed that some broker-dealers did not have adequate written evidence that they had complied with [Rule 15c2-12] and applicable commission guidance related to their due diligence and supervisory obligations,” Simpkins said.
The alert, “Strengthening Practices for the Underwriting of Municipal Securities,” reminded dealers that before underwriting bonds they must review the issuers’ official statement for accuracy and truthfulness, and must “reasonably determine” that an issuer agreed in writing to submit continuing disclosures to the MSRB.
Also, under the MSRB’s Rule G-27, underwriters must have supervisory procedures designed to ensure staff at the firms conduct adequate due diligence.
The SEC’s risk alert includes examples of how underwriters can demonstrate they are conducting adequate due diligence and supervision. Those examples include having detailed policies addressing due diligence, forming due-diligence committees, having record-keeping checklists and conducting onsite examinations.
Simpkins said simply having written supervisory procedures will not satisfy the requirements. “They must also be implemented,” she said. She told an audience of 100 lawyers that underwriters should also “obtain evidence” showing that issuers filed disclosures in the past. Evidence can be obtained from the MSRB’s EMMA disclosure website, or the Nationally Recognized Municipal Securities Information Repositories known as NRMSIRs.
Simpkins said underwriters’ due diligence might include asking lawyers or accountants for assistance, but said underwriters are ultimately responsible. “They cannot delegate it to you,” she told the lawyers. She added that adequate due diligence might require a number of steps.
“You can’t just ask the issuer some questions and get some answers back and say, ‘Okay, there’s the due diligence,’ ” Simpkins said. “There needs to be analysis,” and underwriters should ask follow-up questions. The Securities Exchange Act of 1934 allows the SEC to impose sanctions on a firm or person that has inadequate supervision, she noted.
