This question has been a while but I'm leaving this answer in case anyone else is wondering about this as well. I believe the statement in the text is misleading, or at least unclear. We actually need to use the Vector bundle chart lemma in the book. So we are given $$\Phi_\alpha : \pi^{-1}(U_\alpha)\to U_\alpha \times \mathbb{R}^k : \Phi_\alpha(s^1 \sigma_1(q)+\cdots +s^k \sigma_k(q))=(q,(s^1,\dots, s^k)).$$
And using this by restricting the last $k-m$ coordinates we get the smooth local trivialization candidate for $D$ given by $$\Psi_\alpha: D \cap \pi^{-1}(U_\alpha)=\pi_D^{-1}(U_\alpha) \to U \times \mathbb{R}^m: \Psi_\alpha(s^1 \sigma_1(q)+\cdots +s^m \sigma_m(q))=(q,(s^1,\dots, s^m)).$$
From $\Phi_\alpha$ we do get, as Lee writes, $D\cap \pi^{-1}(U_\alpha)$ as an embedded submanifold of $\pi^{-1}(U_\alpha)$, and from this we get that the map $\Psi_\alpha$ below is a diffeomorphism. But we do not yet have a smooth structure on $D$ or even a topology. So we need to find it using these maps in the Vector Bundle Chart Lemma then naturally $D$ will be a subspace of $E$.
For the Vector Bundle Chart Lemma, the first two conditions are easy. We are already given the cover $\{U_\alpha\}_{\alpha \in A}$ of $M$. And the maps $\Psi_\alpha: \pi^{-1}_D (U_\alpha)\to U_\alpha \times \mathbb{R}^m$ constructed above are bijective whose restriction to each $D_p$ is a vector space isomorphism from $D_p$ to $p \times R^m$. Note that all of this follows from its parent map $\Phi_\alpha$.
So we just need to check the third condition. For each $\alpha,\beta \in A$ with $U_\alpha \cap U_\beta \neq \emptyset$, a smooth map $\tau:U_\alpha \cap U_\beta \to GL(k,R)$ such that the map $\Phi_\alpha \circ \Phi_\beta^{-1}$ from $(U_\alpha \cap U_\beta) \times R^k$ to itself has the form $$\Phi_{\alpha} \circ \Phi_\beta^{-1}(p,v)=(p,\tau(p)v).$$
This is what we get from the vector bundle property of $E$, and note that by the uniqueness of the theorem this holds. Now we just obtain the transition map for $D$ from the transition map for $E$. This is obtained simply by taking the first $m \times m$ submatrix of $\tau$. It is still invertible, and smooth since it is just a composition of $\tau$ with the projection onto the first $m\times m$ coordinates.
Moreover, it satisfies the desired property because, note that the maps $\Phi_\alpha$ takes $D \cap \pi^{-1}(U_\alpha)$ to the subset $\{(q,(s^1,\dots, s^m,0,\dots,0))\} \subset U \times R^k$ which is basically $U\times R^m \times \{0\}^{k-m} \approx U \times R^m$. And all these maps are bijective, so when we are actually considering the transition maps inside $\pi^{-1}(U_\alpha \cap U_\beta) \cap D$, we are limiting ourselves to the vector space where the last $k-m$ components are $0$. Also by bijectivity, the range should have the last $k-m$ components $0$. That means we are multiplying a matrix $A$ by a vector $v$ of the form $v=(v^1,\dots,v^k,0,\dots,0)$ and expecting a response also of the form $w=(w^1,\dots,w^k,0,\dots,0)$. So the result is unaffected by removing the last $k-m$ rows and columns of $\tau(p)$. This is how we define $\tau_{\alpha,\beta}(p)$. The point is that $\Phi_\alpha \circ \Phi_\beta^{-1}$ and $\Psi_\alpha \circ \Psi_\beta^{-1}$ must agree on $(U_\alpha \cap U_\beta) \times R^m$ and this is achieved by setting $\tau_{\alpha,\beta}$, the transition maps for $\Psi_\alpha$ and $\Psi_\beta$ as above. And as mentioned above it is smooth because it is just a composition with a projection map.
Therefore, we have a unique topology and smooth structure making $D$ into a smooth manifold with or without boundary and a smooth rank-$m$ vector bundle over $M$ with $\pi_D$ as its projection and $\{(U_\alpha,\Psi_\alpha)\}$ as smooth local trivializations.
Next, note that from the manifold chart lemma, that the open sets constructed from this lemma are given by $((\phi_p \times Id_{R^k}) \circ \Phi_\alpha)^{-1}(\hat{V_p}\times W)$ for $E$ and $((\phi_p \times Id_{R^m}) \circ \Psi_\alpha)^{-1}(\hat{V_p} \times W)$ for $D$ where $(V_p,\phi_p)$ is a smooth chart for $M$ containing $p$ contained in $U_\alpha$ and $\phi_p(V_p)=\hat{V_p}$, and $W$ are open sets in $R^k$ and $R^m$.
If $D$ has the subspace topology then basis open sets of $D$ are given by the sets $((\phi_p \times Id_{R^k}) \circ\Phi_\alpha )^{-1}(\hat{V_p}\times W) \cap D$. Let's see how this corresponds to the basis in $D$ given from the chart lemma. Now let $W$ be an open set in $R^m$ (not $R^k$). Then the basis is really just $\Psi_\alpha^{-1}(V_p \times W)$. But the image of $\Psi_\alpha$ on $D \cap \pi^{-1}(U)=\pi_D^{-1}(U)$ was just obtained by deleting the last $k-m$ coordinates in $R^k$ from $\Phi_\alpha(\pi^{-1}(U))$ as the last $k-m$ coordinates are all $0$. As the maps are bijective, all that $\Phi_\alpha$ does by restricting the domain to $D$ is fixing the last $k-m$ coordinates to $0$. This means that if $\Phi_\alpha$ maps a set to $V_p \times (W \times R^{k-m})$ then restricting the set to $D$, $\Phi_\alpha$ maps this restricted set to $V_p \times (W \times \{0\}^{k-m})$. Thus by bijectivity, this must be equal to $\Psi_\alpha^{-1}(V_p \times W)$. And hence, $D$ has the subspace topology.
Hence we have shown that $D$ constructed by the Vector Bundle Lemma using $\Psi_\alpha$ as smooth local trivializations has the subspace topology of $E$.
Finally we have to show that the inclusion map $i:D \to E$ is a smooth injective immersion. This is the part that follows from $D \cap \pi^{-1}(U)$ is embedded in $\pi^{-1}(U)$, I believe. So $\pi^{-1}(U)$ is embedded in $E$, as an open subset of $E$, hence $D \cap \pi^{-1}(U)$ is embedded in $E$. And we have $\pi_D: D \to M$ smooth (continuous) so $\pi_D^{-1}(U)= \pi^{-1}(U)\cap D$ is open in $D$. So at every point of $D$ we have a neighborhood in which the inclusion map $i$ is an embedding to $E$, thus $i$ is a smooth immersion, clearly injective. As it has the subspace topology, it is a topological embedding. Hence $D$ is embedded in $E$.