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On March 19, the SEC's Office of Compliance Inspections and
Examinations released a National Examination Risk Alert http://www.sec.gov/about/offices/ocie/riskalert-muniduediligence.pdf
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:
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;
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;
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;
due diligence memoranda prepared by bankers detailing the
subjects discussed in due diligence calls, issues noted and how
such issues were resolved;
outlines for diligence calls prepared by counsel;
records regarding on-site examination activities such as site
visits, discussions with issuer personnel and examinations of
issuer records and forecasts; and
recordkeeping checklists that assist personnel in generating
and preserving due diligence documentation.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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