Series 53 – Municipal Securities Principal Exam Key Study Note Set Two

MSRB Rule G-27(b) details the supervisory responsibilities related to the designation of principals. It mandates that each dealer must designate qualified principals who are responsible for supervising the firm’s municipal securities business and the activities of its associated persons. This includes ensuring compliance with MSRB rules and federal securities laws. The rule requires a written record of these designations, specifying the responsibilities assigned to each principal. Furthermore, it emphasizes the need for an “appropriate principal,” meaning someone with the requisite knowledge and authority to effectively oversee the specific area of municipal securities activities. Failure to properly designate and document these responsibilities can lead to supervisory failures and potential regulatory sanctions. The written record of designations must be maintained according to MSRB Rule G-8(a)(xiv).

SEC Release No. 34-26100, Part III, provides guidance on the “reasonable basis” interpretation for municipal underwriters. This interpretation requires underwriters to conduct a thorough investigation of the issuer and the offering to ensure they have a reasonable basis for believing the accuracy of key representations in the official statement. This due diligence obligation is further reinforced by SEC Rule 15c2-12, which mandates that underwriters obtain and review the official statement before bidding on or purchasing municipal securities. The underwriter’s review must be sufficiently diligent to form a reasonable belief in the accuracy and completeness of the information provided. Failure to conduct adequate due diligence and review the official statement can result in liability for the underwriter if the official statement contains material misstatements or omissions.

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 is crucial because Rule G-37(b) prohibits firms from engaging in municipal securities business with an issuer for two years after a contribution to an issuer official is made by the firm, any MFP of the firm, or any political action committee controlled by the firm or its MFPs. The de minimis exemption allows MFPs to contribute up to \$250 per election to officials for whom they are entitled to vote. Understanding who qualifies as an MFP is essential for firms to monitor and enforce compliance with Rule G-37’s restrictions on political contributions to avoid triggering the business ban.

MSRB Rule G-8(a)(xvi) mandates that dealers maintain records of all political contributions made by the firm, its municipal finance professionals (MFPs), and any political action committees controlled by the firm or its MFPs. These records must include the amount, date, and recipient of each contribution. Furthermore, MSRB Rule G-37(e) requires firms to disclose to the MSRB specific information about contributions and the names of associated persons making contributions. Rule G-37(f) outlines the reporting requirements related to the prohibitions on municipal securities business. The rationale behind these stringent record-keeping and disclosure requirements is to promote transparency and prevent pay-to-play practices in the municipal securities market, ensuring that business decisions are based on merit rather than political influence.

SEC Rule 15c2-12 places significant obligations on municipal underwriters regarding the availability and review of official statements. Specifically, it requires underwriters to obtain and review an official statement that the issuer deems final (excluding certain information) before bidding on or purchasing municipal securities. The underwriter must have a reasonable basis for believing the accuracy of the key representations in the official statement. Failure to conduct adequate due diligence and review the official statement can result in liability under the antifraud provisions of the Securities Exchange Act of 1934, particularly Section 10(b) and Rule 10b-5. Underwriters can be held liable if the official statement contains material misstatements or omissions and they did not conduct a reasonable investigation to verify its accuracy.

MSRB Rule G-24 prohibits municipal securities professionals from using ownership information obtained in a fiduciary or agency capacity for their own benefit or the benefit of others, if such use would be detrimental to the issuer or the customer. This rule aims to prevent conflicts of interest and ensure fair practice. For example, a dealer acting as a financial advisor to an issuer cannot use confidential information about the issuer’s debt portfolio to trade municipal securities for the dealer’s own account, if such trading would disadvantage the issuer. Similarly, a dealer cannot use knowledge of a customer’s large order to front-run the order for the dealer’s benefit. Violations of Rule G-24 can result in disciplinary action by the MSRB and potential legal liabilities.

MSRB Rule G-27(d) mandates that municipal securities dealers conduct internal inspections to ensure compliance with MSRB regulations and supervisory procedures. The frequency and scope of these inspections depend on the firm’s size, structure, and the nature of its municipal securities business. At a minimum, inspections must occur at least annually. These inspections must review, among other things, customer accounts, focusing on suitability determinations (MSRB Rule G-19), and communications with the public (MSRB Rule G-21). The inspections should also verify adherence to supervisory procedures outlined in the firm’s written supervisory procedures (WSPs), as required by MSRB Rule G-27(c). Furthermore, the inspection should assess the firm’s anti-money laundering (AML) compliance program under MSRB Rule G-41. The inspection findings must be documented, and any deficiencies identified must be promptly addressed to maintain compliance.

MSRB Rule G-37(b) establishes a “de minimis” exemption that allows certain political contributions by municipal finance professionals (MFPs) without triggering the two-year ban on municipal securities business with the relevant issuer. Specifically, an MFP can contribute up to \$250 per election to an official of an issuer for whom the MFP is entitled to vote. This exemption applies to each election (primary and general) and is per issuer official. If the MFP is not entitled to vote for the issuer official, no contribution is permitted without triggering the two-year ban. It’s crucial to note that this exemption applies only to contributions made by individual MFPs and not by the firm itself. Furthermore, MSRB Rule G-37(c) prohibits MFPs from soliciting or coordinating contributions to issuer officials, even if the individual contributions fall within the de minimis exemption.

SEC Rule 15c2-12 places specific obligations on municipal underwriters regarding the availability and review of official statements. Underwriters must have a reasonable basis for believing the accuracy of the key representations in the official statement. This involves undertaking a due diligence review of the issuer and the offering. SEC Release No. 34-26100, Part III, provides guidance on what constitutes a “reasonable basis,” emphasizing that underwriters must conduct a thorough investigation to ensure they have a solid foundation for recommending the securities. This includes reviewing the official statement, understanding the issuer’s financial condition, and assessing the risks associated with the offering. The underwriter’s due diligence is crucial for protecting investors and ensuring the integrity of the municipal securities market. Failure to conduct adequate due diligence can result in liability under antifraud provisions.

MSRB Rule G-11(h) mandates that the lead manager of a municipal securities syndicate disclose specific information to syndicate members after the completion of an offering. This disclosure must include a detailed breakdown of syndicate expenses, such as legal fees, advertising costs, and printing expenses. Additionally, the lead manager must disclose the amount of any good faith deposit forfeited by the issuer, as well as the allocation of securities among syndicate members. The purpose of this disclosure is to ensure transparency and fairness in the distribution of profits and losses among syndicate members. By providing a clear accounting of syndicate expenses and allocations, Rule G-11(h) helps to prevent disputes and promotes accountability within the syndicate. This requirement is essential for maintaining the integrity of the underwriting process.

MSRB Rule G-15(a) outlines the requirements for customer confirmations in municipal securities transactions. The confirmation must include key details such as the trade date, settlement date, par value, description of the security (including CUSIP number), price, yield (if applicable), commission (if any), and whether the dealer acted as agent or principal. It must also disclose any control relationship between the dealer and the issuer, as defined in MSRB Rule G-22. The confirmation serves as a crucial record of the transaction, allowing customers to verify the accuracy of the trade and identify any discrepancies. By mandating comprehensive disclosure, Rule G-15(a) protects investors by providing them with the information necessary to make informed decisions and monitor their investments. The rule promotes transparency and accountability in the municipal securities market.

MSRB Rule G-8(a)(xi) specifies the record-keeping requirements for customer account information. Dealers must maintain records of all information obtained about a customer when opening an account, including the customer’s name, address, tax identification number, investment objectives, financial situation, and any other information deemed necessary to make suitable recommendations under MSRB Rule G-19. This information must be preserved for at least six years after the account is closed, as stipulated by MSRB Rule G-9(b). Furthermore, SEC Rule 17a-4 also applies, requiring certain records to be kept for specified periods, some even longer than six years. These record-keeping requirements are essential for ensuring compliance with MSRB regulations, facilitating regulatory oversight, and protecting investors by providing a documented history of customer interactions and account activity.

MSRB Rule G-28 addresses transactions with employees and partners of other municipal securities professionals to prevent potential conflicts of interest and ensure fair dealing. Rule G-28(a) requires that if a municipal securities firm opens an account for an employee or partner of another municipal securities firm, the employer firm must be notified in writing before the first transaction. Furthermore, Rule G-28(b) mandates that duplicate confirmations and account statements be sent to the employer firm. However, Rule G-28(c) provides an exemption for transactions in municipal fund securities, such as 529 college savings plans, where the notification and duplicate confirmation requirements do not apply. This exemption recognizes the unique nature of municipal fund securities and the lower risk of potential conflicts of interest in these transactions. The purpose of Rule G-28 is to ensure transparency and prevent potential abuses in transactions involving industry insiders.

MSRB Rule G-23(d) strictly prohibits a municipal securities dealer acting as a financial advisor to an issuer from underwriting securities of that same issuer. This prohibition is designed to prevent conflicts of interest that could compromise the advisor’s objectivity and loyalty to the issuer. The publication of a favorable research report while serving as a financial advisor creates a clear conflict, potentially influencing the market’s perception of the issuer’s creditworthiness to benefit the dealer’s future underwriting bid. To comply with Rule G-23, the dealer must terminate the financial advisory relationship in writing before pursuing the underwriting engagement. The termination must be disclosed to the issuer, and a reasonable cooling-off period should elapse to demonstrate the separation of roles. Furthermore, the dealer must disclose the prior advisory relationship and the publication of the favorable research report to potential investors in the official statement for the bond offering, as required by MSRB Rule G-32. This disclosure must be clear, prominent, and explain the potential conflict of interest. The dealer should also implement internal controls to ensure that research and underwriting activities are independent and that research reports are not influenced by the desire to obtain underwriting business. Failure to adequately address these conflicts could result in sanctions for violating MSRB rules and SEC antifraud provisions under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.