On March 19, the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations released a National Exam Risk Alert regarding the enhancement of municipal securities underwriting practices. In the Risk Alert, the staff of the SEC’s National Exam Program (NEP staff) observes that broker-dealers may not be engaging in sufficient due diligence practices and provides examples of effective practices.

The Risk Alert reminds broker-dealer underwriters of their due diligence and supervisory obligations under various laws and rules. SEC Rule 15c2-12 under the Securities Exchange Act of 1934 (Rule 15c2-12) sets forth broker-dealer obligations when participating in an underwriting, such as providing continuing disclosure information of annual financial information and material event notices. In addition to Rule 15c2-12, the SEC has provided interpretive guidance regarding broker-dealers’ obligations under the anti-fraud provisions of the federal securities laws, which require broker-dealers to form a “reasonable basis” for offering new issues of municipal securities. By participating in an offering, a municipal underwriter is deemed to be making an implicit representation that it has a reasonable belief in the truthfulness and completeness of the key representations made in any disclosure documents used in the offering. Sole reliance on an issuer’s representations will not suffice in meeting an underwriter’s obligations.