First, calculate the market discount on the bond: \(\text{Par Value} – \text{Purchase Price} = \$1,000 – \$970 = \$30\). Next, calculate the de minimis threshold to determine the tax treatment of the discount. The de minimis rule is defined as 0.25% of the par value multiplied by the number of full years to maturity. The formula is: \(\text{De Minimis Threshold} = 0.0025 \times \text{Par Value} \times \text{Years to Maturity}\). Applying the values from the scenario: \(\text{De Minimis Threshold} = 0.0025 \times \$1,000 \times 10 = \$25\). Now, compare the market discount to the de minimis threshold. The market discount of $30 is greater than the de minimis threshold of $25. Because the discount exceeds the de minimis amount, it must be accreted annually, and this accreted amount is reported as taxable ordinary income for federal tax purposes. The annual straight-line accretion would be \(\frac{\$30}{10 \text{ years}} = \$3\) per year. This amount increases the investor’s cost basis in the bond each year. The tax treatment of discounts on municipal bonds depends on whether the bond was purchased with an Original Issue Discount (OID) or at a discount in the secondary market. For an OID bond, the accreted discount is treated as tax-exempt interest. For a bond purchased in the secondary market, the tax treatment of the discount depends on the de minimis rule. If the discount is at or below the de minimis threshold, the gain is not recognized until the bond is sold or matures, at which point it is treated as a capital gain. However, as demonstrated in this case, when the secondary market discount is larger than the de minimis amount, the investor must accrete the discount over the remaining life of the bond. This annual accreted value is considered taxable ordinary income, not a capital gain or tax-exempt interest. This distinction is critical for correctly advising clients on the tax implications of their municipal bond investments.

The broker-dealer is prohibited from engaging in negotiated municipal securities business with Crestwood City for a two-year period beginning on the date the contribution was made. MSRB Rule G-37 is designed to prevent pay-to-play practices in the municipal securities industry. The rule states that a broker-dealer, its municipal finance professionals (MFPs), or its political action committee (PAC) cannot make contributions to officials of an issuer and then engage in negotiated municipal securities business with that issuer for a period of two years. This two-year prohibition, or “look-back” period, begins on the date the contribution is made. The rule includes a de minimis exception, which permits an MFP to contribute up to $250 per election to an official for whom the MFP is entitled to vote, without triggering the two-year ban on business. In this scenario, the municipal finance professional made a contribution of $200, which is below the $250 threshold. However, the critical condition for the de minimis exception is that the contributor must be entitled to vote for the official receiving the funds. Since the MFP lives in a different municipality and is not entitled to vote for the mayor of Crestwood City, the de minimis exception does not apply. Consequently, the $200 contribution triggers the full two-year ban on negotiated underwriting business for the entire firm, commencing from the date of the contribution.

The calculation determines if the political contribution made by the Municipal Finance Professional (MFP) exceeds the MSRB Rule G-37 de minimis exception. The exception allows an MFP to contribute up to $250 per election to an official for whom the MFP is entitled to vote, without triggering a business prohibition for their firm. Contribution Amount = $300 De Minimis Limit = $250 Excess Contribution = Contribution Amount – De Minimis Limit \[\$300 – \$250 = \$50\] Since the contribution exceeds the allowable limit by $50, the firm is subject to a two-year ban on negotiated municipal securities business with the issuer. MSRB Rule G-37 is designed to prevent pay-to-play practices in the municipal securities industry. The rule prohibits a dealer from engaging in municipal securities business with an issuer for two years after the dealer, one of its Municipal Finance Professionals, or a dealer-controlled Political Action Committee makes a political contribution to an official of that issuer. An official of an issuer is any person who was, at the time of the contribution, an incumbent, candidate, or successful candidate for an elective office of the issuer, which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker-dealer for municipal securities business. There is a de minimis exception for contributions made by MFPs to officials for whom they are entitled to vote, which is limited to $250 per election. In this scenario, the MFP’s contribution of $300 exceeds this limit. This triggers the two-year prohibition on negotiated business, which begins on the date the contribution was made. Separately, MSRB Rule G-23 addresses the conflict of interest that arises when a firm acts as both a financial advisor and an underwriter for the same issue. While a firm can potentially switch from an advisory to an underwriting role by terminating the advisory relationship in writing and obtaining specific consents, this is irrelevant when a Rule G-37 violation has already occurred. The two-year ban from Rule G-37 is absolute and cannot be waived by the issuer, making it the overriding factor that prohibits the firm from participating in the negotiated underwriting.

Total Discount = Par Value – Purchase Price \[\$10,000 – \$9,000 = \$1,000\] Years to Maturity = 10 years Annual Accretion (Straight-Line Method) = Total Discount / Years to Maturity \[\frac{\$1,000}{10 \text{ years}} = \$100 \text{ per year}\] The tax treatment of the discount on a municipal bond depends critically on whether the bond was purchased at a discount at the time of its original issuance or in the secondary market. This process of adjusting the cost basis of a discount bond upwards towards par value over its remaining life is called accretion. For a municipal bond purchased as an Original Issue Discount (OID), the annual accreted amount is considered to be part of the bond’s tax-exempt interest income. Therefore, the investor does not report this annual increase in value as taxable income at the federal level. The bond’s cost basis is increased each year by the accreted amount, so that upon maturity or sale, the difference between the adjusted basis and the sale price or par value is minimized, typically resulting in no capital gain if held to maturity. Conversely, when a municipal bond is purchased at a discount in the secondary market, this is known as a market discount. The annual accreted amount attributable to this market discount is treated as ordinary income and is fully taxable at the federal level. While the coupon interest from the bond remains tax-exempt, the gain resulting from the market discount is not. This prevents investors from converting ordinary income into tax-exempt income.

The correct outcome is determined by applying MSRB Rule G-37, which governs political contributions and their impact on municipal securities business. The rule states that a dealer is prohibited from engaging in negotiated municipal securities business with an issuer for two years after the dealer or one of its Municipal Finance Professionals (MFPs) makes a contribution to an official of that issuer. First, we must identify the MFPs. Leo, as a managing director in the public finance department, is clearly an MFP. Priya, a junior analyst performing only research with no client contact or supervisory duties, does not meet the definition of an MFP. Therefore, her contributions are not subject to the provisions of Rule G-37 that would trigger a ban on her employer. Next, we analyze Leo’s contribution. Leo is an MFP at Apex Underwriters. He contributed to Councilperson Chen, who is an official of the City of Veridia. The rule provides a de minimis exception, which allows an MFP to contribute up to \(\$250\) per election to an official for whom the MFP is entitled to vote, without triggering the two-year ban. In this scenario, Leo is entitled to vote for Councilperson Chen. However, his contribution was \(\$300\). Since \(\$300\) is greater than the \(\$250\) de minimis limit, this contribution violates the exception. As a result of Leo’s contribution exceeding the de minimis threshold, his firm, Apex Underwriters, is subject to a two-year ban on engaging in any negotiated municipal securities business with the City of Veridia. Priya’s contribution is irrelevant to the ban with the City of Veridia, both because she is not an MFP and because her contribution was to a state official, which would impact business with the state, not the city.

Initial Premium = Purchase Price – Par Value = \(\$20,800 – \$20,000 = \$800\) Remaining Maturity at Purchase = 10 years Annual Amortization Amount = \(\frac{\text{Total Premium}}{\text{Years to Maturity}} = \frac{\$800}{10} = \$80\) per year Holding Period = 6 years Total Amortization over Holding Period = Annual Amortization \(\times\) Holding Period = \(\$80 \times 6 = \$480\) Adjusted Cost Basis at Time of Sale = Original Purchase Price – Total Amortization = \(\$20,800 – \$480 = \$20,320\) Sale Proceeds = \(102\%\) of Par Value = \(1.02 \times \$20,000 = \$20,400\) Calculation of Gain or Loss = Sale Proceeds – Adjusted Cost Basis = \(\$20,400 – \$20,320 = \$80\) Capital Gain When an investor purchases a tax-exempt municipal bond in the secondary market at a price above its par value, the amount paid in excess of par is known as the premium. For tax purposes, the IRS requires the investor to amortize this premium on a straight-line basis over the remaining life of the bond. This annual amortization amount systematically reduces the investor’s cost basis in the security each year. It is important to understand that this annual amortization amount is not a deductible loss on the investor’s tax return. The primary purpose of this mandatory basis reduction is to prevent the creation of an artificial tax loss if the bond is held to maturity. If held to maturity, the cost basis would be reduced to par value, resulting in zero capital gain or loss. When the bond is sold prior to maturity, any capital gain or loss must be calculated by comparing the sale proceeds to the adjusted cost basis at the time of the sale, not the original purchase price. The adjusted cost basis is the original cost minus the accumulated amortization up to the sale date. In this scenario, the bond was sold for a price higher than its adjusted cost basis, resulting in a taxable capital gain.

The calculation determines the taxable equivalent yield (TEY), which is the yield a fully taxable bond must offer to be equal to the yield of a tax-exempt municipal bond after taxes are considered. The formula for an investor subject to both federal and state taxes, when considering an in-state municipal bond, is: \[ \text{Taxable Equivalent Yield} = \frac{\text{Tax-Free Municipal Yield}}{1 – (\text{Federal Tax Rate} + \text{State Tax Rate})} \] First, combine the investor’s federal and state tax rates to find the total marginal tax rate. \[ \text{Combined Tax Rate} = 32\% + 6\% = 38\% \text{ or } 0.38 \] Next, calculate the percentage of income the investor keeps after taxes, which is \(1 – \text{Combined Tax Rate}\). \[ 1 – 0.38 = 0.62 \] Finally, divide the municipal bond’s tax-free yield by this after-tax percentage to find the equivalent taxable yield. \[ \text{TEY} = \frac{0.035}{0.62} \approx 0.05645 \] Converting this decimal to a percentage results in approximately 5.65%. The taxable equivalent yield is a critical concept for investors comparing investment opportunities between the municipal and corporate bond markets. It equalizes the comparison by showing what a taxable bond would need to yield to match the after-tax return of a tax-free bond. For an investor like the one in the scenario, a municipal bond issued by their state of residence is typically exempt from both federal and state income taxes, an advantage often referred to as being double tax-free. The formula effectively grosses up the municipal yield to reflect the income that would have been paid in taxes had the investment been in a fully taxable instrument. This calculation is fundamental for making informed suitability determinations, as it directly relates to an investor’s specific tax situation. A higher marginal tax bracket significantly increases the appeal of tax-exempt municipal bonds, as the taxable equivalent yield becomes substantially higher. This analysis helps a representative guide a client toward an investment that maximizes their after-tax income based on their individual financial profile.

Total bonds available for the specific maturity = 1,000 1. Allocate to Pre-sale orders (highest priority): Available bonds: 1,000 Pre-sale orders: 400 Remaining bonds: \(1,000 – 400 = 600\) Pre-sale orders are filled in full. 2. Allocate to Group Net orders (second priority): Available bonds: 600 Group Net orders: 500 Remaining bonds: \(600 – 500 = 100\) Group Net orders are filled in full. 3. Allocate to Designated orders (third priority): Available bonds: 100 Designated orders: 200 Since orders exceed available bonds, the allocation is partial. The 100 remaining bonds are distributed to those who placed designated orders, typically on a pro-rata basis. 4. Allocate to Member Takedown orders (lowest priority): Available bonds: 0 Member orders: 300 No bonds remain for Member orders. In a municipal bond underwriting, particularly for competitive sales, the syndicate establishes a strict priority for allocating bonds to different types of orders. This hierarchy is outlined in the syndicate letter or agreement among underwriters and is governed by MSRB Rule G-11. The standard priority, often called the “order period,” is designed to ensure a fair and orderly distribution process. The highest priority is given to pre-sale orders, which are orders received by the syndicate before it officially wins the bid. These orders help the syndicate gauge interest and formulate its bid. The next level of priority belongs to group net orders, where the profit from the sale is shared by all syndicate members according to their participation. Following group orders are designated orders, which are typically placed by institutions that credit the sale to specific syndicate members of their choosing. The lowest priority is given to member takedown orders, which are orders placed by syndicate members for their own inventory or retail clients. When an issue or a specific maturity is oversubscribed, the syndicate manager must fill orders strictly according to this sequence until all bonds are allocated. Orders at a lower priority level will only be filled if bonds remain after all higher-priority orders have been satisfied. If there are insufficient bonds to fill all orders at a particular priority level, those orders are typically filled on a pro-rata basis.

The correct outcome is determined by analyzing two separate MSRB rules: Rule G-37 on political contributions and the rules governing solicitation of municipal securities business, which were historically covered in Rule G-38. 1. Analysis of the Political Contribution under MSRB Rule G-37: * The rule prohibits a dealer from engaging in negotiated municipal securities business with an issuer for two years after the dealer or its Municipal Finance Professionals (MFPs) make a contribution to an official of that issuer. * However, there is a de minimis exception. An MFP is permitted to contribute up to \( \$250 \) per election to a candidate for whom the MFP is entitled to vote. * In this scenario, Anya Sharma, an MFP, contributes \( \$250 \) to a mayoral candidate she is entitled to vote for. Her contribution falls exactly within the de minimis exception. Therefore, her contribution does not trigger the two-year ban for Keystone Capital Markets. 2. Analysis of the Solicitor Engagement: * MSRB rules, specifically those derived from the former Rule G-38 and now integrated into rules like G-20 and G-42, strictly regulate the use of third-party solicitors by dealers. * A dealer is prohibited from paying a person who is not an affiliated person of the dealer (i.e., not an employee or part of the same corporate structure) to solicit municipal securities business on its behalf. * Nexus Consultants is described as a third-party, independent entity. While it is a registered municipal advisor, it is not a registered broker-dealer or an affiliated person of Keystone Capital Markets. Paying such an entity to solicit underwriting business is a direct violation of MSRB rules. 3. Conclusion: * The political contribution by the MFP is compliant. The engagement of the independent municipal advisor as a paid solicitor is a violation. The two events are distinct regulatory considerations. The primary issue is the prohibited solicitation arrangement. MSRB Rule G-37 is designed to prevent pay-to-play practices, where firms make political contributions to secure municipal underwriting business. The two-year ban is a significant penalty for violations. The de minimis exception is a critical detail, allowing MFPs to participate in local politics in a limited way without penalizing their firms. The rules governing solicitors are intended to maintain transparency and prevent the use of unregistered or improperly compensated consultants to influence the awarding of municipal business. A dealer can generally only use its own employees or other registered broker-dealers (e.g., in a syndicate) to solicit business. Paying an independent municipal advisor for this purpose is forbidden, as it creates a conflict of interest and circumvents the regulatory structure. Therefore, the firm’s proposed action regarding the consultant is the central violation in this scenario, regardless of the separate, compliant political contribution.

Total Premium = Purchase Price – Par Value = \(\$10,500 – \$10,000 = \$500\) Years to Maturity at Purchase = 10 years Annual Amortization Amount (Straight-Line) = Total Premium / Years to Maturity = \(\$500 / 10 = \$50\) Holding Period = 4 years Total Amortized Premium = Annual Amortization Amount * Holding Period = \(\$50 \times 4 = \$200\) Adjusted Cost Basis at Time of Sale = Original Purchase Price – Total Amortized Premium = \(\$10,500 – \$200 = \$10,300\) Calculation of Capital Gain or Loss = Sale Proceeds – Adjusted Cost Basis = \(\$10,350 – \$10,300 = \$50\) The result is a capital gain of $50. When an investor purchases a tax-exempt municipal bond at a premium, the premium amount must be amortized annually over the remaining life of the bond. This annual amortization reduces the investor’s cost basis in the security. For tax-exempt bonds, this amortization is mandatory and the amount amortized each year is not a deductible loss against ordinary income. The primary function of this accounting rule is to systematically reduce the cost basis so that if the bond is held to maturity, its basis will equal its par value, resulting in no reportable capital loss. If the bond is sold prior to maturity, any capital gain or loss is calculated by comparing the sale proceeds to the adjusted cost basis at the time of the sale, not the original purchase price. The adjusted cost basis is the original cost less the accumulated amortization. In this case, the straight-line amortization method is applied. The total premium is divided by the number of years to maturity to find the annual amount. This annual amount is then multiplied by the number of years the bond was held to determine the total reduction in basis. The resulting adjusted basis is then subtracted from the sale proceeds to determine the taxable capital gain or loss.

The first step is to determine if the market discount qualifies for the de minimis exception. The de minimis rule states that if a market discount is less than \(0.25\%\) (\( \frac{1}{4} \text{ of } 1\% \)) of the par value for each full year from the date of purchase to maturity, the discount can be treated as a capital gain at maturity rather than being accreted as ordinary income. 1. Calculate the de minimis threshold: Par Value = \(\$1,000\) Years to Maturity = 10 years De Minimis Rate per Year = \(0.0025\) Total De Minimis Threshold = Par Value \(\times\) Years to Maturity \(\times\) Rate Total De Minimis Threshold = \(\$1,000 \times 10 \times 0.0025 = \$25.00\) 2. Calculate the actual market discount: Par Value = \(\$1,000\) Purchase Price = \(\$970\) Market Discount = Par Value – Purchase Price Market Discount = \(\$1,000 – \$970 = \$30.00\) 3. Compare the market discount to the de minimis threshold: The actual market discount of \(\$30.00\) is greater than the de minimis threshold of \(\$25.00\). 4. Determine the tax treatment: Because the market discount exceeds the de minimis amount, it does not qualify for capital gains treatment. The investor must accrete the discount over the remaining life of the bond. This accreted amount is reported each year as interest income, which is taxable at ordinary income tax rates. The coupon interest from the municipal bond remains federally tax-exempt, but the gain attributable to the market discount is not. When a municipal bond is purchased in the secondary market at a price below its par value, the difference is known as a market discount. The tax treatment of this discount upon disposition or maturity depends on the de minimis rule. This IRS rule provides a threshold to determine if a market discount is too small to require annual accretion. The threshold is calculated as one-quarter of one percent of the bond’s stated redemption price at maturity, multiplied by the number of complete years from the acquisition date to the maturity date. If the market discount is less than this calculated threshold, it is considered de minimis and is treated as a capital gain when the bond is sold or matures. However, if the market discount is equal to or greater than the de minimis threshold, the gain is treated as ordinary income. The investor has the choice to either accrete the discount annually and pay ordinary income tax on the accreted amount each year, or to wait until the bond is sold or matures and report the entire discount as ordinary income at that time. In this scenario, the calculated market discount is larger than the de minimis threshold, meaning the resulting gain must be treated as ordinary income, not a capital gain. This is separate from the tax-exempt treatment of the coupon interest payments.

\[\$20,000,000 \text{ (Presale Orders)} + \$30,000,000 \text{ (Group Net Orders)} = \$50,000,000\] The total par value of the presale and group net orders equals the total size of the bond issue. In a negotiated municipal underwriting, the syndicate manager is responsible for allocating bonds when an issue is oversubscribed. MSRB Rule G-11 governs the priority of orders. While the issuer can specify different terms, the standard industry practice, which is typically outlined in the agreement among underwriters, follows a specific sequence. The highest priority is given to presale orders, which are orders received by the syndicate before the bid is won or the final terms are set. The next level of priority belongs to group net orders, where the sales credit is shared by all syndicate members on a pro-rata basis. Following group net orders are designated orders, in which a buyer designates specific syndicate members to receive the sales credit. The lowest priority is reserved for member orders, also known as member-at-the-takedown orders, which are placed by syndicate members for their own inventory or related accounts. In a situation where an issue is oversubscribed, the syndicate manager must follow this allocation waterfall strictly. Bonds are first allocated to fill all presale orders. If any bonds remain, they are allocated to group net orders. If group net orders exceed the remaining bonds, the allocation is done on a pro-rata basis within that category. Lower-priority orders, such as designated and member orders, would receive no allocation if higher-priority orders fully subscribe the issue.

The correct outcome is determined by applying the provisions of MSRB Rule G-37. 1. Identify the individual’s status: Anya becomes a Municipal Finance Professional (MFP) upon joining Keystone Municipal Advisors. An MFP is an associated person of a broker-dealer who is primarily engaged in municipal securities representative activities, solicits municipal securities business, or is in the chain of command for such persons. 2. Analyze the contribution: Anya contributed $500 to an official of an issuer, the Port Authority. 3. Apply the de minimis exception: MSRB Rule G-37 allows an MFP to contribute up to $250 per election to an official for whom the MFP is entitled to vote, without triggering a ban on business. Anya’s contribution of $500 exceeds this limit. 4. Apply the look-back provision: The rule includes a look-back provision for new MFPs. It examines contributions made by an individual for the two years prior to becoming an MFP. If a contribution made during this look-back period would have triggered the ban had the person been an MFP at the time, the ban is applied to the firm. 5. Determine the consequence and duration: Because Anya’s $500 contribution exceeds the de minimis limit, her new employer, Keystone, is banned from engaging in negotiated municipal securities business with the Port Authority. The ban lasts for two years, and critically, the two-year clock starts from the date the contribution was made (April 15, 2024), not from the date Anya became an MFP (September 1, 2024). Therefore, Keystone is prohibited from participating in the October 2024 negotiated underwriting. MSRB Rule G-37 is designed to prevent pay-to-play practices, where firms might make political contributions to secure municipal securities business. The rule imposes a strict two-year ban on negotiated business with an issuer if the firm or its MFPs make a contribution exceeding the de minimis amount to an official of that issuer. The definition of an MFP is broad and includes not just representatives but also their supervisors. The look-back provision is a critical component that prevents firms from circumventing the rule by hiring individuals who have recently made significant contributions. The ban applies to the entire firm, not just the individual who made the contribution; therefore, simply isolating the individual from the transaction is not a permissible remedy. The two-year prohibition is a direct and significant consequence intended to sever any potential link between political donations and the awarding of municipal business. Understanding the timing of the ban’s commencement, which is the date of the contribution itself, is essential for proper compliance.

First, determine if the market discount exceeds the de minimis threshold. Total Market Discount = Par Value – Purchase Price = \(\$1,000 – \$970 = \$30\) De Minimis Threshold = \(0.25\% \times \text{Years to Maturity} \times \text{Par Value}\) De Minimis Threshold = \(0.0025 \times 10 \times \$1,000 = \$25\) Since the market discount of \(\$30\) is greater than the de minimis amount of \(\$25\), the discount does not qualify for capital gains treatment. The discount must be accreted annually, and this accretion is taxed as ordinary income. Annual Accretion (Straight-Line) = \(\frac{\text{Total Market Discount}}{\text{Years to Maturity}} = \frac{\$30}{10} = \$3\) This \(\$3\) annual accretion is reported as taxable ordinary income each year. The tax treatment of a discount on a municipal bond depends on whether it is an Original Issue Discount (OID) or a market discount acquired in the secondary market. For a bond purchased with a market discount, the IRS provides a de minimis rule to determine the tax treatment. This rule states that if the discount is less than one-quarter of one percent (0.25%) of the stated redemption price at maturity, multiplied by the number of full years from the date of purchase to maturity, the discount is considered to be zero for tax purposes until the bond is sold or matures. In that case, the discount would be treated as a capital gain. However, if the market discount is greater than the de minimis amount, as it is in this situation, the tax treatment changes significantly. The investor must accrete the discount over the remaining life of the bond. This annual accreted amount is not considered tax-exempt interest like the bond’s coupon payments. Instead, it is treated as taxable interest income, subject to the investor’s ordinary income tax rate. The investor’s cost basis in the bond is increased each year by the amount of the accreted discount, which reduces the capital gain or increases the capital loss realized upon the eventual sale or redemption of the bond.

The de minimis threshold is calculated as 0.25% of the par value multiplied by the number of full years from the purchase date to maturity. Par Value = $1,000 Years to Maturity = 18 years De Minimis Rate = 0.25% or 0.0025 De Minimis Threshold Calculation: \[ \text{Threshold} = 0.0025 \times 18 \text{ years} \times \$1,000 \] \[ \text{Threshold} = 0.045 \times \$1,000 \] \[ \text{Threshold} = \$45.00 \] The actual market discount is the difference between the par value and the purchase price. \[ \text{Market Discount} = \$1,000 – \$960 = \$40.00 \] Comparing the actual discount to the threshold: The actual market discount of $40.00 is less than the de minimis threshold of $45.00. When a municipal bond is purchased in the secondary market at a discount, and that bond was not originally issued with a discount (OID), the discount is considered a market discount. The tax treatment of this market discount depends on its size relative to the de minimis rule. The de minimis rule states that if the market discount is less than one-quarter of one percent (0.25%) of the principal amount, multiplied by the number of full years remaining until the bond’s maturity, the discount is considered to be zero for tax purposes. If the discount falls below this calculated threshold, it is not required to be accreted as ordinary income over the life of the bond. Instead, when the bond is sold, redeemed, or matures, the entire amount of the discount is treated as a capital gain. In this specific scenario, the calculated de minimis threshold is greater than the actual market discount on the bond. Therefore, the market discount is treated as zero, and the investor will report the difference between the purchase price and the redemption value as a capital gain in the year the bond matures. This is a more favorable tax treatment than having the discount taxed as ordinary income.

The correct action is dictated by the priority provisions established in the syndicate agreement, which must comply with MSRB Rule G-11. This rule governs the conduct of syndicates in primary offerings and mandates a fair and orderly distribution process. The standard priority for allocating orders, often remembered by the acronym PGDM, is as follows: Pre-sale orders, Group net orders, Designated orders, and finally, Member orders. In an oversubscribed offering, the syndicate manager must fill orders strictly according to this hierarchy. Pre-sale orders, which are received before the syndicate officially wins the bid, are given the highest priority and must be filled first. After all pre-sale orders are satisfied, the manager moves to the next tier, which is Group net orders. These are orders placed for the benefit of the entire syndicate, with profits shared proportionally among members. If bonds remain after filling all group net orders, the manager then allocates to Designated orders, where a buyer designates specific members to receive credit. The lowest priority is given to Member orders, which are placed by syndicate members for their own accounts or inventory. The manager cannot deviate from this sequence, for instance, by prioritizing a large designated order over group net orders. This rigid process ensures fairness and transparency in the allocation of sought-after new issues, preventing the manager from favoring certain clients or syndicate members over others in violation of the syndicate agreement and MSRB rules.

The scenario involves an analysis under MSRB Rule G-37, which governs political contributions and prohibitions on municipal securities business. 1. Identify the key individuals and entities: Amina is a Municipal Finance Professional (MFP) because she is a managing director in the public finance department. Keystone Capital is the municipal securities dealer. Councilperson Davis is an official of the City of Veridia, a municipal issuer. 2. Analyze the action: Amina makes a $300 contribution to the mayoral campaign of Councilperson Davis. 3. Apply the de minimis exception of Rule G-37: The rule provides an exception for contributions made by MFPs to officials of an issuer. This exception allows an MFP to contribute up to $250 per election to an official for whom the MFP is entitled to vote, without triggering a ban on business. 4. Evaluate the conditions of the exception: In this case, two conditions are not met. First, the contribution amount of $300 exceeds the $250 limit. Second, Amina is not entitled to vote for Councilperson Davis. Because the MFP is not entitled to vote for the official, any contribution, regardless of amount, would trigger the prohibition. 5. Determine the consequence: A contribution that does not meet the de minimis exception results in the municipal securities dealer (Keystone Capital) being prohibited from engaging in municipal securities business with that specific municipal issuer (the City of Veridia). This prohibition lasts for a period of two years from the date of the contribution. MSRB Rule G-37 is designed to sever any connection between the making of political contributions and the awarding of municipal securities business, a practice known as pay-to-play. The rule applies to municipal securities dealers, their Municipal Finance Professionals (MFPs), and political action committees (PACs) controlled by the dealer or its MFPs. An MFP is broadly defined to include associated persons primarily engaged in municipal securities representative activities, anyone who solicits municipal securities business, and direct supervisors of these individuals. When an MFP makes a contribution to an official of an issuer, the firm is subject to a two-year ban on negotiated underwriting business with that issuer. The only exception is the de minimis allowance, which permits a contribution of up to $250 per election, but only if the MFP is entitled to vote for that official. If the MFP is not entitled to vote for the official, or if the contribution exceeds $250, the ban is triggered. The ban applies to the entire firm, not just the individual who made the contribution. It is a strict liability rule, meaning intent does not matter.

First, determine the total discount and the de minimis threshold. Par Value = $1,000 Issue Price = $940 Years to Maturity = 20 Total Discount = Par Value – Issue Price = \($1,000 – $940 = $60\) Next, calculate the de minimis threshold to determine the tax treatment of the discount. The de minimis rule states that a discount is insignificant if it is less than 0.25% (or 1/4 of 1%) of the par value per year to maturity. De Minimis Threshold = \(0.0025 \times \text{Par Value} \times \text{Years to Maturity}\) De Minimis Threshold = \(0.0025 \times \$1,000 \times 20 = \$50\) Compare the total discount to the de minimis threshold. The total discount of $60 is greater than the $50 de minimis threshold. Therefore, the discount is considered an Original Issue Discount (OID). For a municipal bond, the OID must be accreted annually over the life of the bond. This annual accretion amount is treated as tax-exempt interest, just like the bond’s stated coupon payments. The accretion also increases the investor’s cost basis in the bond each year. Annual Accretion = \(\frac{\text{Total OID}}{\text{Years to Maturity}} = \frac{\$60}{20} = \$3\) per year. At the end of 20 years, the investor’s cost basis will have accreted from the purchase price of $940 to the par value of $1,000. Adjusted Cost Basis at Maturity = \(\text{Original Cost} + \text{Total Accretion} = \$940 + \$60 = \$1,000\). When the bond matures, the investor receives the $1,000 par value. Since the proceeds at maturity equal the adjusted cost basis, there is no capital gain or loss to report. The tax treatment of a discount on a municipal bond purchased at issuance depends on whether the discount qualifies as an Original Issue Discount (OID) or falls under the de minimis rule. The de minimis threshold is calculated as one-quarter of one percent of the principal amount, multiplied by the number of full years to maturity. If the discount is at or below this threshold, it is considered de minimis. A de minimis discount is not accreted annually; instead, it is treated as a taxable capital gain when the bond is sold or matures. However, if the discount exceeds the de minimis threshold, it is classified as OID. For a municipal bond, this OID must be accreted each year using a constant yield method or straight-line method. This annual accreted amount is considered additional interest income, which is federally tax-exempt. Importantly, the accreted amount increases the investor’s cost basis in the bond. This upward adjustment ensures that when the bond matures or is sold, the accreted portion is not taxed again as a capital gain. For an investor holding an OID municipal bond to maturity, the cost basis will accrete to the par value, resulting in no capital gain or loss upon redemption.

This is not a calculation-based question. The solution is derived by applying the specific provisions of MSRB Rule G-37. 1. Identify the relevant rule: MSRB Rule G-37 governs political contributions and their impact on municipal securities business. 2. Identify the key parties: Leo is a municipal finance professional (MFP) for Apex Underwriters. Ms. Alvarez is an official of the municipal issuer (the school district). 3. Analyze the contribution: Leo’s contribution of $300 to Ms. Alvarez’s campaign exceeds the $250 de minimis exception allowed for contributions to officials for whom the MFP is entitled to vote. Any contribution over this amount by an MFP triggers a prohibition. 4. Apply the “look-back” provision: Rule G-37 includes a two-year look-back period. This means that if a firm hires an individual as an MFP, any political contributions made by that individual in the two years prior to starting employment can trigger a ban for the new employer. Leo made the contribution on March 1, 2023, and joined Apex on August 1, 2023. The contribution falls within this two-year look-back window. 5. Determine the consequence and duration: The triggering contribution results in a two-year ban on the firm (Apex Underwriters) from engaging in negotiated municipal securities business with the issuer (the school district). The two-year ban begins on the date the contribution was made, not on the date the MFP was hired. Therefore, the ban started on March 1, 2023, and will last for two years. MSRB Rule G-37 is designed to prevent pay-to-play arrangements, where municipal securities firms make political contributions to issuer officials to influence the awarding of negotiated underwriting business. The rule applies to contributions made by the firm itself, its municipal finance professionals (MFPs), and its political action committees. An MFP is an associated person of a dealer who is primarily engaged in municipal securities representative activities, solicits municipal securities business, or is in the supervisory chain above such persons. When an MFP makes a contribution that exceeds the de minimis amount of $250 per election to an official for whom they can vote, it triggers a two-year prohibition for the firm on engaging in negotiated business with that official’s municipality. A critical component of this rule is the two-year look-back provision. This provision states that a dealer is also subject to the ban if it hires an MFP who made a triggering contribution within the two years prior to becoming an MFP at the firm. The two-year ban on business always commences from the date of the contribution, regardless of when the individual joined the firm. This prevents firms from circumventing the rule by having individuals make contributions and then hiring them after the fact.

Total Gain = Sale Price – Purchase Price = \($980 – $920 = $60\) Market Discount = Par Value – Purchase Price = \($1,000 – $920 = $80\) Annual Accretion (Straight-Line) = Total Market Discount / Years to Maturity at Purchase = \($80 / 10 = $8\) per year Total Accreted Discount over Holding Period = Annual Accretion × Years Held = \($8 \times 4 = $32\) Adjusted Cost Basis = Purchase Price + Total Accreted Discount = \($920 + $32 = $952\) Capital Gain = Sale Price – Adjusted Cost Basis = \($980 – $952 = $28\) The final tax consequence is the combination of the accreted discount and the capital gain. When a municipal bond is purchased in the secondary market for less than its par value, the difference is known as a market discount. This is distinct from an original issue discount (OID), where the bond is first sold to the public at a discount. The tax treatment for these two types of discounts differs significantly. For a market discount on a municipal bond, the discount must be accreted over the life of the bond. This accreted amount is not considered tax-exempt interest. Instead, upon the sale or redemption of the bond, the accreted portion of the market discount is reported and taxed as ordinary income. The investor’s cost basis in the bond is adjusted upward each year by the amount of the accretion. In this scenario, the straight-line method is used, resulting in an equal amount of accretion each year. When the bond is sold, the total gain is first calculated. From this total gain, the portion attributable to the accumulated accretion is treated as ordinary income. Any remaining gain, which is the difference between the sale price and the adjusted cost basis, is treated as a capital gain.

The calculation to determine the tax consequences of the bond sale is as follows: 1. Identify the market discount. The bond was purchased for \( \$920 \), which is a discount from the par value of \( \$1,000 \). Market Discount = Par Value – Purchase Price = \( \$1,000 – \$920 = \$80 \) 2. Calculate the annual accretion of the market discount using the straight-line method. The bond had \(8\) years remaining to maturity at the time of purchase. Annual Accretion = Total Market Discount / Years to Maturity at Purchase = \( \$80 / 8 = \$10 \) per year. 3. Determine the total accreted discount over the holding period. Kenji held the bond for \(3\) years. Total Accreted Discount = Annual Accretion × Years Held = \( \$10 \times 3 = \$30 \) 4. Calculate the investor’s adjusted cost basis at the time of sale. This is the original cost plus the accreted discount. Adjusted Cost Basis = Purchase Price + Total Accreted Discount = \( \$920 + \$30 = \$950 \) 5. Determine the capital gain or loss from the sale. This is the difference between the sale proceeds and the adjusted cost basis. Capital Gain = Sale Proceeds – Adjusted Cost Basis = \( \$971 – \$950 = \$21 \) The total profit from the transaction is \( \$971 – \$920 = \$51 \). This profit is bifurcated for tax purposes. The accreted market discount portion, which is \( \$30 \), is reported as taxable ordinary income. The remaining profit, \( \$21 \), is reported as a capital gain. When a municipal bond is purchased in the secondary market at a discount, this is known as a market discount. This situation is distinct from an Original Issue Discount (OID), where the bond is first issued to the public at a price below par. The tax treatment for these two types of discounts differs significantly. For a municipal bond, the accretion of an OID is considered part of the tax-exempt interest. However, the accretion of a market discount is not. The annual accreted amount of a market discount on a municipal bond is fully taxable as ordinary income in the year of sale or at maturity. To calculate the taxable gain upon sale, the investor must first adjust their cost basis upwards by the amount of the discount that has accreted over the holding period. The sale proceeds are then compared to this adjusted cost basis. Any amount of the sale price that exceeds the adjusted cost basis is treated as a capital gain. Therefore, the total profit is separated into two components for tax reporting: the accreted market discount, which is taxed as ordinary income, and the capital gain.

The core of this scenario revolves around MSRB Rule G-23, which governs the activities of financial advisors. The rule establishes a significant barrier to prevent conflicts of interest, generally prohibiting a municipal securities dealer that has a financial advisory relationship with an issuer concerning a new issue from acting as an underwriter for that same issue. However, the rule provides a specific exception for new issues sold on a competitive bid basis, which is the method chosen by the City of Silver Creek in this case. For the firm to switch from its role as financial advisor to underwriter in a competitive sale, it must satisfy several stringent conditions. First, the financial advisory relationship must be formally terminated in writing. Second, and critically, the issuer must provide its express written consent allowing the firm to participate in the competitive bidding process. The firm must also disclose in writing to the issuer the source and anticipated amount of its remuneration as an underwriter. These steps ensure that the issuer is fully aware of the change in the firm’s role and the potential conflict of interest, and explicitly permits the firm to proceed. This contrasts sharply with a negotiated underwriting, where such a switch in roles would be strictly prohibited.

The logical deduction for the correct allocation priority is based on MSRB Rule G-11, which governs primary offering practices for municipal securities. The rule establishes a standard sequence for allocating bonds in a new issue to ensure a fair and orderly distribution process, particularly when the issue is oversubscribed. This priority is typically outlined in the syndicate letter or agreement among underwriters. The standard sequence, often remembered by the acronym PGDM, dictates the order in which different types of orders are filled. First, Presale orders are filled. These are orders submitted to the syndicate manager before the final pricing of the issue is determined. They have the highest priority because they demonstrate significant early interest and help the underwriting syndicate gauge demand and structure the deal effectively. Second, Group Net orders are filled. These are orders placed for the benefit of the entire syndicate, with all members sharing in the takedown profit according to their participation percentage. These orders benefit the syndicate as a whole rather than individual members. Third, Designated orders are filled. In these orders, the customer specifies or designates which syndicate member or members should receive credit for the sale. The takedown is directed to the specified members. Fourth, and last in priority, are Member Takedown orders. These are orders placed by a syndicate member for its own account, either for its inventory or to fill its own retail customer orders. These orders benefit only the individual member placing them. Therefore, the correct sequence of allocation is Presale, then Group Net, then Designated, and finally Member orders.

The logical determination for the correct answer proceeds as follows. First, in a competitive bid for a municipal bond issue, the winning syndicate is the one that submits the bid resulting in the lowest Net Interest Cost (NIC) or True Interest Cost (TIC) for the issuer. Second, the “cover bid” is defined as the second-best bid submitted. It is the bid that would have won had the winning syndicate not participated or had it submitted a less aggressive bid. The difference between the winning bid’s interest cost and the cover bid’s interest cost is the margin of victory, often referred to as the amount “left on the table.” A large margin means the winner paid significantly more (i.e., offered the issuer a much lower interest cost) than was necessary to win. Therefore, the primary tactical objective for a syndicate manager is to construct a bid that is just aggressive enough to beat the anticipated cover bid, but by the smallest possible margin, perhaps by as little as \(0.001\%\) in TIC. This maximizes the syndicate’s potential spread or profit. Accurately gauging the likely level of the cover bid, based on market conditions, pre-sale interest, and intelligence about other bidding syndicates, is the most crucial element in this final, tactical pricing decision. While broader market indicators like visible supply inform the general interest rate environment, and internal documents like the syndicate agreement govern operations, the estimation of the immediate competition, embodied by the cover bid, directly dictates the fine-tuning of the final bid price to ensure it is both successful and profitable.

The core of this problem lies in understanding the fundamental difference between how Net Interest Cost (NIC) and True Interest Cost (TIC) are calculated and how this difference impacts bidding strategy for a competitive underwriting. NIC is a straightforward calculation that sums the total interest payments the issuer will make over the life of the bond issue and subtracts any premium paid by the syndicate. It does not account for the time value of money. In contrast, TIC incorporates the time value of money by discounting all future debt service payments (principal and interest) to their present values. Because money received sooner is worth more than money received later, the timing of interest payments significantly affects the TIC calculation. To achieve the lowest possible TIC, a syndicate must structure its bid to minimize the present value of the total debt service. This is strategically accomplished by assigning higher coupon rates to the bonds with earlier maturities and lower coupon rates to the bonds with later maturities. The larger, earlier interest payments have a greater impact on the present value calculation. By front-loading the interest cost in this manner, the overall discounted cost to the issuer is lowered, resulting in a more competitive TIC bid, even if the total dollar amount of interest paid over the bond’s life (the NIC) might be higher than a bid with a different coupon structure. This strategy directly addresses the time-value-of-money component inherent in the TIC method.

No calculation is required for this question. The solution is based on a logical application of MSRB Rule G-37. First, identify the relevant regulation, which is MSRB Rule G-37, concerning political contributions and prohibitions on municipal securities business. This rule is designed to prevent “pay-to-play” practices where firms make political contributions to secure underwriting business. Second, analyze the status of the employee, Anya. Although she was not a Municipal Finance Professional (MFP) at the time of the contribution, she later became one. Rule G-37 includes a “look-back” provision. This provision applies the rule’s prohibitions to contributions made by an individual for the two years prior to them becoming an MFP. Third, evaluate the contribution itself. Anya contributed $500. The rule provides a de minimis exception allowing MFPs to contribute up to $250 per election to an official for whom they are entitled to vote. Anya’s contribution of $500 exceeds this limit, and the scenario does not state she was entitled to vote for the official. Therefore, the contribution is a triggering event. Fourth, determine the consequence. Because Anya’s disqualifying contribution was made within the two-year look-back period before she became an MFP, it triggers a two-year ban on the firm, Keystone Municipal Advisors, from engaging in negotiated municipal securities business with the issuer, the City of Oakhaven. Finally, establish the timeline for the ban. The two-year prohibition begins on the date the triggering contribution was made, not on the date the employee became an MFP. Therefore, the ban on Keystone Municipal Advisors engaging in negotiated business with the City of Oakhaven starts from March 1, the date of Anya’s contribution.

Logical Deduction: 1. Identify the relevant MSRB Rule: Rule G-37, which governs political contributions and prohibits municipal securities business. 2. Identify the contributor and their status: Kenji is a Municipal Finance Professional (MFP). 3. Identify the recipient: A candidate who becomes the Mayor of the City of Veridia, an “official of an issuer.” 4. Analyze the contribution: Kenji contributed \(\$300\) on May 1, 2023. 5. Apply the de minimis exception under Rule G-37: An MFP may contribute up to \(\$250\) per election to an official for whom the MFP is entitled to vote. 6. Test the contribution against the exception’s two conditions: a. Amount Condition: The contribution of \(\$300\) exceeds the \(\$250\) limit. The condition is not met. b. Voting Rights Condition: Kenji does not live in the City of Veridia and is not entitled to vote for the mayoral candidate. The condition is not met. 7. Conclusion from exception test: Since the contribution fails to meet the requirements for the de minimis exception, it is a disqualifying contribution. 8. Determine the consequence: A disqualifying contribution triggers a two-year ban on the MFP’s firm (Apex Underwriters) from engaging in negotiated municipal securities business with the issuer (City of Veridia). 9. Calculate the ban period: The two-year ban begins on the date of the contribution, May 1, 2023, and ends on May 1, 2025. 10. Final determination: Apex Underwriters is prohibited from participating in the negotiated underwriting for the City of Veridia in March 2024, as this date falls within the two-year ban period. MSRB Rule G-37 is designed to sever any connection between political contributions and the awarding of municipal securities business, a practice known as pay-to-play. The rule states that a broker-dealer is prohibited from engaging in negotiated municipal securities business with an issuer for a period of two years after the firm or any of its Municipal Finance Professionals makes a contribution to an official of that issuer. An official of an issuer includes an incumbent, a candidate for office, or a successful candidate. The ban applies to the entire firm, not just the individual who made the contribution. There is a de minimis exception that allows an MFP to make contributions without triggering the ban, but it is very narrow. The MFP may contribute no more than \(\$250\) per election to any official for whom the MFP is entitled to vote. Both conditions, the dollar amount and the voting eligibility, must be met for the exception to apply. In the given scenario, the MFP’s contribution of \(\$300\) exceeds the \(\$250\) limit. Furthermore, the MFP was not entitled to vote for the candidate. Because the contribution fails on both counts, it is considered a disqualifying event. The two-year ban on negotiated business for the firm begins on the date the contribution was made.

The calculation first determines the de minimis threshold for a bond purchased at a discount in the secondary market. The de minimis rule states that a market discount is considered to be zero if it is less than \(0.25\%\) (\(0.0025\)) of the stated redemption price at maturity, multiplied by the number of full years from the date of purchase to maturity. For the two bonds in the scenario, both have 10 years to maturity and a \( \$1,000 \) par value. De Minimis Threshold Calculation: \[ \text{Threshold} = 0.0025 \times \text{Par Value} \times \text{Years to Maturity} \] \[ \text{Threshold} = 0.0025 \times \$1,000 \times 10 = \$25.00 \] Next, we compare the discount of each bond to this threshold. Bond A Discount: \( \$1,000 – \$970 = \$30.00 \) Bond B Discount: \( \$1,000 – \$976 = \$24.00 \) Comparison: Bond A’s discount (\( \$30 \)) is greater than the de minimis threshold (\( \$25 \)). Bond B’s discount (\( \$24 \)) is less than the de minimis threshold (\( \$25 \)). Conclusion: Because Bond A’s discount exceeds the threshold, it is treated as a standard market discount. The accreted value of this discount is taxed as ordinary income at the time of sale or maturity. Because Bond B’s discount is below the threshold, it qualifies for the de minimis exemption. This allows the entire discount to be treated as a capital gain at the time of sale or maturity, which is generally taxed at a more favorable rate than ordinary income. When a municipal bond is purchased in the secondary market for a price below its par value, the difference is known as a market discount. The tax treatment of this discount is fundamentally different from that of an Original Issue Discount (OID). For a municipal OID bond, the annual accretion of the discount is considered part of the tax-exempt interest income. However, for a market discount, the annual accretion is generally considered taxable interest income, taxed at ordinary income rates. This income is typically realized and taxed when the bond is sold or matures. There is a significant exception to this rule known as the de minimis rule. This IRS provision allows investors to treat a small market discount as a capital gain rather than ordinary income. The rule defines a small discount as one that is less than one-quarter of one percent of the bond’s stated redemption price, multiplied by the number of full years remaining until maturity. If the market discount is less than this calculated amount, the entire gain is treated as a capital gain. If the discount is equal to or greater than this amount, the accreted discount is taxed as ordinary income. This distinction is critical for investors as capital gains are often taxed at a lower rate than ordinary income.

The calculation proceeds as follows: First, determine the total discount on the Original Issue Discount (OID) bond. This is the difference between the par value and the original issue price. Total Discount = Par Value – OID Price = \(\$1,000 – \$800 = \$200\) Next, calculate the annual accretion amount using the straight-line method. This spreads the total discount evenly over the bond’s life. Annual Accretion = Total Discount / Years to Maturity = \(\$200 / 10 = \$20\) per year. Then, calculate the total accretion for the period the investor held the bond, which is six years. Total Accretion = Annual Accretion * Years Held = \(\$20 \times 6 = \$120\) This total accretion is added to the original cost to find the adjusted cost basis at the time of sale. Adjusted Cost Basis = Original Cost + Total Accretion = \(\$800 + \$120 = \$920\) Finally, calculate the capital gain or loss by comparing the sale price to the adjusted cost basis. Capital Gain/Loss = Sale Price – Adjusted Cost Basis = \(\$970 – \$920 = \$50\) Since the result is positive, it represents a taxable capital gain. An Original Issue Discount, or OID, bond is issued at a price significantly below its par value. The discount represents a form of interest to the investor. For municipal OID bonds, this discount must be accreted annually over the life of the bond. Accretion is the process of systematically increasing the bond’s carrying value each year. The annual accreted amount is considered tax-exempt interest income for the investor, just like the bond’s stated coupon payments, if any. This annual accretion also increases the investor’s cost basis in the bond. If the bond is sold prior to maturity, the gain or loss for tax purposes is determined by comparing the sale price to this adjusted cost basis, not the original purchase price. Any amount received from the sale that is above the adjusted cost basis is treated as a capital gain and is subject to capital gains tax. Conversely, if the bond were sold for less than its adjusted cost basis, the result would be a capital loss. It is critical to distinguish between the tax-exempt accreted interest and the potentially taxable capital gain realized upon a secondary market sale.

The conclusion is reached by applying the provisions of MSRB Rule G-37. First, the contribution amount of $300 is evaluated against the de minimis exception. The rule allows a municipal finance professional (MFP) to contribute up to $250 per election to an official for whom they are entitled to vote, without triggering a ban on business. Since Anya’s contribution of $300 exceeds this limit, it is not a de minimis contribution. Second, the timing of the contribution and Anya’s promotion is assessed under the rule’s “look-back” provision. This provision states that if a person makes a contribution and then becomes an MFP within two years of that contribution, the firm is subject to the same prohibition as if the person were an MFP at the time of the contribution. Anya was promoted to MFP one year after her contribution, which is within the two-year look-back window. Therefore, her non-de minimis contribution triggers the prohibition. Finally, the consequence of the violation is determined. The rule imposes a two-year ban on the firm from engaging in negotiated municipal securities business with the issuer. The two-year ban period begins on the date the contribution was made, not on the date the employee became an MFP. MSRB Rule G-37 is designed to prevent pay-to-play practices, where municipal securities firms make political contributions to issuer officials to influence the awarding of municipal securities business. The rule applies to contributions made by the firm, its political action committees, and its municipal finance professionals. An MFP is an associated person of a dealer who is primarily engaged in municipal securities representative activities, solicits municipal securities business, or supervises such activities. A critical and often tested component of this rule is the two-year look-back provision. This means a firm must consider contributions made by an employee for the two years prior to that employee becoming an MFP. If a contribution made during that look-back period would have triggered a ban had the employee been an MFP at the time, the firm is then banned from business for two years, with the ban commencing from the date of the contribution. The only exception is for de minimis contributions of $250 or less, per election, made by an MFP to an official for whom the MFP is entitled to vote. It is important to distinguish that this prohibition applies to negotiated underwritings, not competitive bid underwritings.