Last week, the SEC entered orders against three underwriters for failing to comply with Securities Exchange Act of 1934 (“Exchange Act”) Rule 15c2-12. These actions serve as a good reminder for compliance checks and policies and procedures related to exempt transactions. The SEC orders noted the following shortcomings of the parties serving as sole underwriter:
- The underwriter sold securities to broker-dealers and certain investment advisers without a reasonable belief that the broker-dealers and investment advisers were purchasing the securities for investment as required under Rule 15c2-12(d)(1)(i).
- The underwriters did not inquire, or otherwise determine, if the broker-dealers and investment advisers were purchasing the securities for more than one account or for distribution.
- They also failed to ascertain for whom the broker-dealers and investment advisers were purchasing the securities.
- The underwriter lacked policies and procedures reasonably designed to ensure that purchasers satisfied the exemption’s requirements.
- The underwriter did not provide the investors with copies of any preliminary official statement or final official statement or determine that a continuing disclosure undertaking had been entered into by the issuer or obligated person.
Based on those circumstances, the orders found that each underwriter violated:
- Rule 15c2-12 as well as MSRB Rule G-27, which requires municipal underwriters to adopt, maintain and enforce written supervisory procedures reasonably designed to ensure compliance with Rule 15c2-12 and
- Section 15B(c)(1) of the Exchange Act for failing to comply with the MSRB rule.
The exemption provided in Rule 15c2-12(d)(1)(i) on which the underwriters were attempting to rely requires that the securities are sold to no more than 35 persons, each of whom the underwriter reasonably believes:
(A) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment; and
(B) Is not purchasing for more than one account or with a view to distributing the securities.
Each underwriter was ordered to pay disgorgement and prejudgment interest and civil penalties.
The SEC filed a complaint against a fourth underwriter alleging it failed to comply with the limited offering exemption because it did not have a reasonable belief that the municipal securities were being sold only to sophisticated investors that were each buying the securities for a single account without a plan to distribute them. The SEC alleged that the underwriter violated Rule 15c2-12, MSRB Rules G-17 and G-27 and Exchange Act Section 15B(c)(1).
