WASHINGTON — Underwriters may need to withdraw from a competitive transaction if they uncover inaccurate disclosure and the issuer cannot resolve their concerns, a dealer group said in guidance released last week.
The Bond Dealers of America’s two-page document, entitled “Guidance for Municipal Underwriters in Understanding Due Diligence Responsibilities in Competitively Bid Transactions,” was prepared by Elizabeth Columbo, a partner at Nixon Peabody LLP in New York and Daniel Deaton, a partner in the firm’s Los Angeles office.
It follows similar guidance BDA issued earlier this month for underwriters in negotiated deals.
Competitive deals pose a challenge for municipal underwriters, who do not participate in drafting the bond offering documents and often lack opportunities to discuss the disclosure with the issuer, the guidance said.
Based on a 1988 interpretive release from the Securities and Exchange Commission, which outlines muni underwriters’ due-diligence obligations, underwriters must review the bond offering documents and evaluate whether the disclosure is materially incomplete or inaccurate.
If the disclosure raises concerns, the underwriter must ask the issuer or financial advisor about it and receive a “credible explanation” that “resolves the concerns,” BDA said.
“Ultimately,” the underwriter “may need to abstain from participating in the transaction,” the guidance said.
Under the antifraud provisions of the federal securities laws, an underwriter must have a reasonable basis to believe an issuer’s bond offering documents are accurate.
The reasonableness of an underwriter’s belief “will depend upon all the circumstances,” the SEC’s release said.
BDA’s attorneys said they are letting people know that the SEC’s 1988 release still applies.
“All we are doing is saying what the SEC said,” Deaton said.