The Securities and Exchange Commission (SEC) recently issued a Risk Alert on compliance measures to help broker-dealers fulfill their due-diligence duties when underwriting offerings of municipal securities.
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 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.
Brokerage firms have a duty to perform due diligence on any investment prior to recommending it for sale to its clients. As concerns grow that local governments may default on their debt, brokerage firms may have to demonstrate that they performed due diligence on these municipal securities prior to recommending them to their clients.
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