WASHINGTON — Securities and Exchange Commission chairman Mary Jo White said Wednesday that an examination of national and regional municipal securities underwriters and a resulting 2012 risk alert on whether they were doing enough to ensure the accuracy of offering documents is an example of how behind-the-scenes SEC action protects investors.
Speaking at the Practising Law Institute’s 45th Annual Securities Regulation Institute, White focused on how unpublicized SEC work frequently contributes to the health of U.S. financial markets and held up a 2011 muni underwriter investigation as a prime example.
“Our Chicago regional office set out to examine a number of regionally and nationally prominent broker-dealers engaged in municipal underwritings to see whether the broker-dealers had a process for determining that the bonds they are selling to investors were sound,” White told conference attendees.
The SEC’s Rule 15c2-12 on disclosure requires underwriters to obtain official statements before bidding on, or purchasing, munis and review issuers’ disclosures for completeness and accuracy. Broker-dealers are also required, under the Municipal Securities Rulemaking Board’s Rule G-27, to have written policies and procedures to ensure they comply with Rule 15c2-12. The SEC can file securities fraud charges against firms if it deems their due diligence faulty, as occurred Tuesday when Piper Jaffray & Co. and one of its bankers paid $300,000 and $25,000 respectively to settle charges they failed to meet their due obligations when reviewing a Wenatchee, Wash. issuer’s bond documents before underwriting.
The SEC said the official statement for $41.77 million of bond anticipation notes issued in 2008 by the Wenatchee Regional Events Center Public Facilities District wrongly stated there had been no independent reviews of the financial projections for the center, when an independent consultant had actually examined the projections twice and questioned the economic viability of the project. The OS also failed to disclose that the financial projections were revised upward based on optimistic assurances by civic leaders that the community would support the project, the SEC alleged. In addition, the OS omitted key information about Wenatchee’s remaining debt capacity of $19.3 million, which would limit its ability to support any future long-term bonds, the SEC found.
White, who joined the SEC earlier this year, said the 2011 investigation found underwriter underwrite due diligence practices lacking.
“Unfortunately, not only did many broker-dealers do an inadequate job of due diligence, if they conducted any at all, but several had decided not to keep records of their inquiries into specific offerings as required by the rules. We were deeply concerned that this practice created significant risks for retail investors.”
The SEC issued a March 19, 2012 risk alert reminding broker dealers of their obligations under the securities rules and included examples of practices they can adopt to show they used due diligence and followed proper supervisory reviews.
“We did not bring a case and we did not write a new rule,” White said. “But we believe that firms are now more likely to maintain due diligence files and improve the overall quality of the practices they use. While every enforcement action involves a public filing that lays out what we have found, examinations we conduct are often confidential by law. And yet their behind-the-scenes efforts can be just as significant and indeed far-reaching across an entire industry.”