WASHINGTON -- Federal regulators will be asked to investigate whether underwriters and lawyers advised an East Baton Rouge, La., authority of its disclosure responsibilities if the issuer proceeds with a controversial redemption Thursday, a Municipal Securities Rule-making Board official said.

"If the redemption goes forward, we will ask the Securities and Exchange Commission and the National Association of Securities Dealers to determine whether or not the underwriters fulfilled their responsibilities" in the 1989 refunding that escrowed to maturity some of the East Baton Rouge Mortgage Finance Authority's housing bonds, said Christopher A. Taylor, the MSRB's executive director.

"We'll ask them to look at the issue of whether adequate disclosure was made with regard to this issue," said.

Taylor's warning that he will call for the investigation, which if carried out would mark the first time the self-regulatory body has asked the SEC for such an inquiry, comes in the wake of increasing pressure by the SEC for the MSRB to toughen its regulation of municipal securities dealers to provide more protection for consumers.

Taylor's remarks also come just days after a group of investors asked the SEC to investigate whether the East Baton Rouge authority's proposed May 20 redemption of the bonds would violate securities laws.

In addition, Stoever, Glass & Co., a broker-dealer in New York that traded the bonds, warned the authority and the SEC last week that it may take legal action if the redemption occurs.

The investors and traders contend the redemption would violate securities laws because the authority either did not retain its right to call the bonds before maturity or did not adequately disclose the fact that it had reserved its call right.

The authority, however, insists that it both reserved its call right and adequately disclosed that fact and plans to proceed with the redemption. It plans to redeem the bonds with the money it receives from collapsing and liquidating the securities that were put into escrow to pay debt service -- a simple transaction that does not involve underwriters or bond counsel.

But Taylor said yesterday that federal and industry investigations of the redemption would focus as much on the underwriters, the bond counsel, and any other advisers associated with the 1989 refunding as on the issuer. The SEC and NASD, he said, would take a close look at whether the firms properly advised the issuer of its disclosure requirements.

The underwriting and law firms that took part in the East Baton Rouge Mortgage Finance Authority's 1989 refunding either could not be reached for comment yesterday or would not comment on their participation in the 1989 transaction.

The lead underwriter for the refunding issue was Morgan Keegan & Co. in Memphis. The other underwriters were Howard, Weil, Labouisse, Friedrichs Inc. based in New Orleans, and Smith Barney, Harris Upham & Co., based in New York.

The bond counsel was Selvidge & Hicks, a firm that no longer exists but whose top partners are now with Kutak Rock, a law firm based in Omaha. Kutak Rock, which was called Kutak, Rock & Campbell in 1989, had several roles in the transaction, acting as special tax counsel, co-counsel for the underwriters, and co-counsel for the credit enhancement provider. Kutak is also currently advising the authority on the redemption. The other firm acting as underwriter's counsel was Konrad, Earnest & Michaelis tn Metairie, La.

John Ramsay, deputy chief counsel for the SEC's division of market regulation, said yesterday that while he cannot comment on specific transactions or investigations, generally "disclosure obligations are placed on all of the parties that participate in the selling of bonds" that are refunded and escrowed to maturity when the issuer wants to reserve its right to call them.

Ramsay said the disclosure obligations are spelled out in the letter that the SEC staff sent to the MSRB in June 1988 clarifying the SEC's stance on the early redemption of bonds that have been escrowed to maturity.

The SEC letter notes that the MSRB's "Rule G-17 has been interpreted by the board to require a dealer that assists an issuer of a refunding bond offering in preparing disclosure documents to alert the issuer of the need to disclose whether it has reserved the right to call the prior bonds before maturity."

The letter states further that, "Before a security is sold as ~escrowed to maturity' or ~pre-refunded to first call,' the dealer should have conducted a reasonable investigation to satisfy itself that the documents relating to the prior bond issue and the refunding bond issue including the official statement and the escrow trust agreement support such characterization."

"It is important that the underwriters of the refunding bond issue, as well as the issuer, and attorneys drafting the bond documents take special care to clarify the status of the prior bonds that are being refunded," the letter says. "It would be misleading for the issuer to reserve optional redemption rights without disclosing this fact."

SEC officials have said that "misleading" is a term often used in securities fraud litigation.

The SEC letter concludes that if an issuer wants to retain its right to call the bonds, it "should clearly and conspicuously disclose its intention in the defeasance notices and official statement for the refunding bonds."

In the case of the East Baton Rouge authority's bonds, neither the official statement for the 1989 refunding nor the escrow deposit agreement state that the issuer reserved its right to call the bonds. One participant who did not want to be identified, however, said the call feature was retained in the notice of defeasance that was appended to the escrow deposit agreement.

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