The eligibility of some investment banks to underwrite municipal bonds in Texas is being reviewed as the state verifies compliance with its fossil fuel law, according to the attorney general’s office.

The state comptroller asked 158 financial firms — including investment companies, mutual funds and others — to clarify their treatment of energy companies. Issuers have the ability to replace banks they have hired to work on transactions under certain circumstances, according to guidelines from the office of Texas Attorney General Ken Paxton.

A notice to the bond attorney on Wednesday said the comptroller’s request effectively challenges a company’s statement that it does not boycott energy companies and that issuer contracts should replace energy banks. investment that find themselves on the list of companies boycotting energy companies.

The advice came as uncertainty continues to swirl around new Texas laws that bar banks and other companies from winning government contracts if their policies are seen as harmful to the fossil fuel or firearms industries.

Texas Attorney General Ken Paxton’s office said issuers can remove investment banks without penalty from municipal bond deals if the state later finds out the banks are boycotting energy companies.

“I don’t think you can have a deal where, in between pricing and closing, you could get the lead underwriter to drop out and have someone step in,” a Texas bond attorney said. “I think issuers will steer clear of these companies until there is clarity on their position with the comptroller’s office.”

A law that took effect September 1 prohibits state agencies from investing in financial companies that boycott energy companies, a major sector of the Texas economy. The Texas Comptroller is required to compile a list of companies that shun or penalize a company for engaging in the exploration, production, use, transportation, sale or manufacture of energy based of fossil fuels and is not committed to exceeding state and federal environmental standards. standards.

Contracts worth $100,000 or more with state or local governments require written verification from companies that they are not boycotting energy companies. The attorney general requires standing letters from companies stating that they comply with this law and another that prohibits contracts with entities that “discriminate” against the firearms industry.

Beginning in March, Texas Comptroller Glenn Hegar sent letters to 158 U.S. and foreign financial firms asking them to clarify their policies and procedures for investing in fossil fuels and to provide a list of mutual funds or exchange-traded funds in their portfolios that prohibit or limit fossil fuel investments. . Companies were given 60 days to respond or be deemed to boycott energy-related businesses.

Among the recipients were several banks that underwrite municipal bonds – JP Morgan Chase, UBS Group, Wells Fargo, Barclays Capital, Goldman Sachs Asset Management, Morgan Stanley Investment Management and RBC Global Asset Management.

In Wednesday’s notice, the attorney general’s office addressed a situation in which some bond issuers have a contract with an anonymous bank “which may be on the state’s list of financial companies that boycott energy companies.” .

The issuers have been advised to continue with the contract “provided the issuer confirms with the company shortly before closing that we can continue to rely on their standing letter and that the company intends to respond in due course. appropriate at the request of the controller”.

If a contract extends beyond the 60-day period given to companies to respond to the monitor, the contract should allow the issuer, without penalty, to find a replacement if the company ends up on the list of companies boycotting, the notice says.

“There is no way to transfer after pricing the notes that have been written for the purchase of the bonds from one primary underwriter to another,” the bond attorney said. “I think before pricing, if these companies come under suspicion, there’s always a cloud, you’ll see them quit or the issuer will pull them out of the deal.”