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The Securities and Exchange Commission issued a Risk Alert this week on compliance measures to help broker-dealers fulfill their due-diligence duties when underwriting offerings of municipal securities. The agency also issued an Investor Bulletin to help educate investors about municipal bonds.
The alert issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) notes that in recent years there has been significant attention focused on the financial condition of some state and local governments, and cites concerns about the extent of written documentation by broker-dealers of due diligence efforts and supervision of municipal securities offerings.
“The Commission’s examination staff has observed that some broker-dealers have not maintained adequate written evidence that they complied with their responsibilities regarding due diligence and supervision,” said OCIE Director Carlo di Florio. “To protect investors, it is important that broker-dealers perform adequate due diligence to assess the financial and operational condition of states and municipalities before selling their securities to the public.”
The alert includes examples of practices used by broker-dealers that may help to demonstrate due diligence and supervisory reviews. These include the use of detailed written policies and procedures, the use of commitment committees, due diligence memoranda, outlines for due diligence calls, recordkeeping checklists, and on-site examination activities. Practices such as these could help a firm show how it is meeting its obligation to perform due diligence, and to support that it has a reasonable belief as to the accuracy and completeness of the Official Statements describing the municipal bond offering.
OCIE staff Dan Gregus, George Kramer and Peggy Willenbucher contributed substantially to this Risk Alert.
The Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy (OIEA) describes the attributes of municipal bonds, including investment risks, and provides information on where investors may obtain additional data on particular bonds.
“The best way for investors to protect themselves is by making fully informed decisions. This is true for any investment, including investments in municipal bonds. Our Investor Bulletin is meant to help investors learn as much as they need when considering an investment in municipal bonds,” said OIEA Director Lori Schock.
A copy of the Investment Bulletin on Municipal Bonds can be found by clicking here.