FINRA Series 53 Municipal Securities Principal Exam Key Study Note

MSRB Rule G-17 mandates that municipal securities professionals conduct all municipal securities and advisory activities fairly and without deceptive practices. A principal must establish and enforce written supervisory procedures (WSPs) under MSRB Rule G-27(c) that detail how the firm ensures fair dealing. These procedures should include regular reviews of transactions and communications to detect potential unfair practices, such as excessive markups or unsuitable recommendations. The principal must also ensure that associated persons understand and adhere to the principles of fair dealing, providing ongoing training and education on ethical conduct. Furthermore, the supervisory system should include mechanisms for identifying and addressing potential conflicts of interest, as well as ensuring that all material information is disclosed to customers. Failure to adequately supervise compliance with Rule G-17 can result in disciplinary action by the MSRB.

MSRB Rule G-37(b) prohibits a firm from engaging in municipal securities business with an issuer within two years after a contribution to an issuer official made by the firm, any municipal finance professional (MFP) associated with the firm, or any political action committee (PAC) controlled by the firm or its MFPs. However, a de minimis exception exists under Rule G-37(b)(i). An MFP can contribute up to \$250 per election to an official for whom the MFP is entitled to vote. To demonstrate compliance, MSRB Rule G-8(a)(xvi) requires detailed records of all political contributions, including the amount, recipient, and date of the contribution. The firm must also maintain records demonstrating that the MFP was entitled to vote for the official to whom the contribution was made. These records are subject to inspection by regulatory authorities to ensure adherence to the rule’s provisions.

SEC Rule 15c2-12 requires municipal securities underwriters to have a reasonable basis for believing the accuracy of key representations in official statements about municipal securities they are underwriting. This obligation is further elaborated in SEC Release No. 34-26100, Part III, which emphasizes that underwriters must conduct a thorough review of the official statement and related documents to ensure they have a reasonable basis for their recommendations. Specifically, underwriters must obtain and review the official statement before bidding on or purchasing the securities. They must also ensure that the issuer has undertaken to provide continuing disclosure of material events. Failure to comply with Rule 15c2-12 and the “reasonable basis” interpretation can result in liability for misstatements or omissions in the official statement.

MSRB Rule G-27(e) mandates that a municipal securities principal must establish and implement procedures for the review and retention of both incoming and outgoing correspondence with customers, including electronic communications. This review is intended to detect potential violations of MSRB rules, such as misleading statements or unsuitable recommendations. The principal must ensure that these procedures are documented in the firm’s written supervisory procedures (WSPs). Furthermore, MSRB Rule G-21 addresses advertising and requires that all advertisements, including those disseminated through electronic means, be approved in writing by a principal before use. The principal’s review of correspondence must also consider whether the communications constitute advertising and comply with the content and disclosure requirements of Rule G-21. The retention of these records must comply with MSRB Rule G-9 and SEC Rule 17a-4.

MSRB Rule G-28(a) requires that if a municipal securities dealer opens an account for an employee or partner of another municipal securities professional, the executing dealer must follow specific procedures. These include obtaining prior written consent from the employer and providing duplicate confirmations and account statements to the employer. Rule G-28(b) further stipulates that any transactions in the account must be executed according to the instructions of the employer. However, MSRB Rule G-28(c) provides an exemption for transactions involving municipal fund securities, such as 529 plans. This exemption means that the requirements for prior written consent and duplicate confirmations do not apply to transactions in these types of securities. The rationale behind this exemption is that municipal fund securities are generally considered less susceptible to conflicts of interest.

MSRB Rule G-8(a)(viii) mandates that municipal securities dealers maintain detailed records concerning primary offerings of municipal securities. These records must include information about the underwriting syndicate, the allocation of securities, and the distribution of the official statement. Furthermore, MSRB Rule G-8(a)(xiii) requires dealers to keep records of all disclosures made in connection with primary offerings, as required by MSRB Rule G-32. This includes documentation of the information provided to customers, such as the offering price, the underwriter’s compensation, and any material risks associated with the securities. These record-keeping requirements are essential for ensuring compliance with disclosure obligations and for providing regulators with the information necessary to oversee the municipal securities market. Failure to maintain these records can result in disciplinary action.

MSRB Rule G-27(a) establishes the fundamental obligation of every dealer to supervise the municipal securities activities of its associated persons. This supervisory responsibility is not merely a procedural formality but a substantive requirement to ensure compliance with MSRB rules and applicable securities laws. A compliant supervisory system must encompass several key elements, including the establishment of written supervisory procedures (as detailed in MSRB Rule G-27(c)), the designation of qualified principals to oversee specific areas of the municipal securities business (as outlined in MSRB Rule G-27(b)), and the implementation of internal inspection programs to detect and prevent violations (as described in MSRB Rule G-27(d)). Furthermore, the system should provide for the ongoing training and education of associated persons to ensure they are knowledgeable about applicable rules and regulations. The failure to establish and maintain an adequate supervisory system can result in disciplinary action against the dealer and its principals.

MSRB Rule G-37(g) defines a “municipal finance professional” (MFP) broadly to include associated persons of a broker, dealer, or municipal securities dealer who are primarily engaged in municipal securities activities, as well as their supervisors. This definition extends to individuals who solicit municipal securities business or have management responsibility over persons engaged in such activities. Rule G-37(b) generally prohibits a firm from engaging in municipal securities business with an issuer for two years after a contribution is made to an issuer official by the firm, its MFPs, or political action committees controlled by the firm or its MFPs. However, the de minimis exemption, as outlined in G-37(b), provides a limited exception. It allows MFPs to contribute up to \$250 per election to officials for whom they are eligible to vote, without triggering the two-year ban. This exemption is strictly construed and applies only to contributions made by individual MFPs who are eligible to vote for the official in question.

SEC Rule 15c2-12 imposes significant obligations on municipal underwriters concerning the availability and review of official statements. Specifically, underwriters must undertake a reasonable investigation to ensure that they have a reasonable basis for believing the accuracy and completeness of the key representations made in the official statement. This involves obtaining and reviewing the official statement before bidding on or purchasing the securities. The “reasonable basis” interpretation, as detailed in SEC Release No. 34-26100, Part III, requires underwriters to conduct a thorough due diligence investigation of the issuer and the proposed offering. This includes examining the issuer’s financial condition, its ability to repay the debt, and the legal and regulatory framework governing the issuance. By mandating this level of scrutiny, Rule 15c2-12 aims to protect investors by ensuring that underwriters have a solid understanding of the risks associated with new municipal issues.

MSRB Rule G-11(h) mandates comprehensive disclosure of syndicate expenses and other relevant information to customers during primary offerings of municipal securities. This rule aims to promote transparency and ensure that customers are fully informed about the costs associated with the offering. Specifically, the lead manager of the syndicate is responsible for disclosing to syndicate members, and ultimately to customers, details regarding expenses such as legal fees, printing costs, and other administrative charges. Furthermore, the rule requires disclosure of any concessions or discounts offered to syndicate members, as well as the allocation of securities among different order types. This information must be provided in a clear and understandable manner, allowing customers to assess the true cost of investing in the new issue and make informed investment decisions. Failure to comply with these disclosure requirements can result in disciplinary action by the MSRB.

MSRB Rule G-18 requires dealers to use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. This “best execution” obligation is not simply about obtaining the lowest price; it encompasses a broader assessment of market quality and execution efficiency. Factors that a dealer should consider when determining the best market and price include the accessibility of the market, the price volatility of the security, the size and type of the transaction, and the dealer’s knowledge of trading patterns and market participants. The dealer must also consider any potential conflicts of interest that may arise in the execution process and prioritize the customer’s interests above its own. Compliance with Rule G-18 requires dealers to have robust policies and procedures in place to ensure that they are consistently seeking best execution for their customers.

MSRB Rule G-8(a)(vii) outlines the specific record-keeping requirements for transactions where a municipal securities dealer acts as principal. These records must include details such as the date and time of the transaction, the security involved, the quantity, the price, and the contra-party. Crucially, the records must also reflect the dealer’s inventory position both before and after the transaction, allowing regulators to assess the dealer’s trading activity and potential market manipulation. In contrast, MSRB Rule G-8(a)(vi) specifies the record-keeping requirements for agency transactions, where the dealer acts as an intermediary between a buyer and a seller. For agency transactions, the records must include the name of the customer, the commission charged, and whether the order was solicited or unsolicited. The key difference lies in the need to track inventory positions for principal transactions, reflecting the dealer’s direct participation in the market as a buyer or seller.

MSRB Rule G-14(b) mandates that all municipal securities transactions be reported to the MSRB or its designated agent promptly and accurately. The primary mechanism for this reporting is the Real-Time Transaction Reporting System (RTRS). Dealers are required to report transaction data, including price, yield, quantity, and other relevant details, to RTRS as soon as practicable after execution. The specific timeframe for reporting depends on the type of transaction, but generally, trades must be reported within 15 minutes of execution. RTRS plays a crucial role in promoting transparency and market surveillance in the municipal securities market. By providing real-time information on trading activity, RTRS allows regulators to monitor market conditions, detect potential abuses, and ensure fair pricing. The data collected by RTRS is also used to calculate benchmark prices and provide valuable information to investors and market participants.

MSRB Rule G-11(h) mandates comprehensive disclosure of syndicate expenses and other relevant information by the lead manager. This includes, but is not limited to, detailing all expenses incurred during the underwriting process, such as legal fees, printing costs for the official statement, and any other direct or indirect costs associated with the issuance. The lead manager must also disclose the initial offering price (IOP) and the underwriting spread, breaking down the allocation among the management fee, underwriting fee, and selling concession. Furthermore, any anticipated or actual changes to the syndicate’s composition or allocations must be promptly communicated to all syndicate members. Failure to provide accurate and timely disclosures can have significant implications. Syndicate members rely on this information to assess the profitability and risk associated with their participation. Inaccurate disclosures could lead to misinformed investment decisions, potentially resulting in financial losses for syndicate members. Moreover, non-compliance with Rule G-11(h) can result in regulatory sanctions, including fines, censure, or other disciplinary actions by the MSRB. The lead manager has a fiduciary responsibility to act in the best interests of the syndicate members, and transparency in expense reporting is crucial to fulfilling this duty.