The SEC’s Heightened Scrutiny of Broker-Dealer Municipal Securities Underwriting and Public Entity Sales Practices


Following its much publicized 2010 enforcement division reorganization, the results of the SEC’s increased efforts to police public sector securities transactions are now emerging. These efforts have been spearheaded by the enforcement division’s Municipal Securities and Public Pensions unit, or MSPP, which has been working in close coordination with the SEC’s Office of Compliance Inspections and Examinations (OCIE) staff. The headline enforcement actions in this area have involved municipal securities pricing and valuation fraud, public pension accounting and disclosure fraud, and “pay-to-play” activities and other forms of public corruption. However, a significant pattern of examination and enforcement activity is emerging concerning more fundamental broker-dealer sales practices and underwriting activities. These cases reflect an emphasis of the SEC on municipal securities underwriting practices and broker-dealer suitability obligations owed to public entity investors.

The SEC is conducting a broad review of municipal securities offerings with a focus, for the first time, on the sufficiency of an underwriter’s due diligence procedures to fully discharge its obligations under Rule 15c2-12 of the Securities Exchange Act of 1934. FINRA also included municipal securities in its January 31, 2012, letter on regulatory and examination priorities.

In light of this heightened scrutiny, we recommend that municipal securities underwriters closely review the conduct and documentation of their ongoing due diligence activities. Compliance personnel should also confirm that their firms have adequate written supervisory procedures regarding due diligence activities; that sufficient records are retained and organized to reflect such activities; that personnel involved in performing due diligence have appropriate experience, training and oversight; and that supervisors and other responsible employees are aware of the increased scrutiny in this area.

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