SEC Reasonable Basis Standard
Prior to 1988, competitively bid municipal underwritings mistakenly considered themselves to have virtually no responsibility regarding the accuracy of the offering disclosure documents. This failure was felt to have been a contributing factor to the New York City fiscal crisis of the 1970s and the 1983 Washington Public Power Supply System bond default on its cancelled nuclear power plants.
By participating in an offering, however, an underwriter makes an implied recommendation about the securities, suggesting that the underwriter has a reasonable basis for belief in the truthfulness and completeness of the disclosure documents used in the offerings. In September 1988, the SEC issued a release requiring that municipal underwriters have a reasonable basis for recommending municipal securities to the public and that they review in a professional manner the accuracy of t