Chapter 7 Study Notes P1

Question 1

Fair Dealing Rule (G-17)

Answer 1

According to the MSRB fair dealing rules, a municipal securities broker or dealer may not engage in any deceptive, dishonest, or unfair practices. All material information that relates to a transaction should be disclosed to a customer at or before the sale, including a description of the security. The more complex the municipal security, the broader the range of information that needs to be reviewed by the dealer. This obligation to disclose exists even if the dealer is acting as an order taker and not recommending the security. The

Question 2

Investor Type Disclosures
D-15
G-47
G-48

Answer 2

 Rule D-15 – defines a specific type of institutional investor which is the sophisticated municipal market professional (SMMP)
 Rule G-47 – relates to the Time of Trade Disclosures
 Rule G-48 – relates to Transactions with Sophisticated Municipal Market Professionals

Question 3

Sophisticated Municipal Market Professional (SMMP) (D-15)

Answer 3

The MSRB has clarified a municipal securities dealer’s obligation with respect to dealing with sophisticated municipal market professionals. Additionally, the MSRB has established three separate requirements for executing transactions with an SMMP:

1. Nature of the customer
2. Dealer determination of customer sophistication
3. Customer affirmation

Question 4

Sophisticated Municipal Market Professional

qualification

Answer 4

The customer must be a person or entity with total assets of at least $50 million, a bank, a savings and loan association, an insurance company, a registered investment company, or investment adviser that’s registered with either the SEC under the Investment Advisers Act of 1940 or with a state securities commission.

Question 5

Sophisticated Municipal Market Professional

Customer Affiramation

Answer 5

The customer must affirmatively indicate that it’s exercising independent judgment in evaluating:
 The recommendations of the dealer
 The quality of execution of the customer’s transactions by the dealer, and
 The transaction price for non-recommended secondary market agency transactions for which the dealer’s services have been explicitly limited to providing anonymity, communication, order matching and/or clearance functions, and the dealer doesn’t exercise discretion as to how or when the transactions are executed
The dealer must assume that the SMMP has timely access to material information that’s available publicly through established industry sources which are regularly used by dealers, such as EMMA and credit rating agencies.

Question 6

Disclosures in Connection with a Primary Offering (G-32)

Answer 6

MSRB Rule G-32 The requirements pertain to customer disclosure requirements, underwriters’ submissions of official statements (OS) to the EMMA system, and preparation of official statements by financial advisors. The underwriter is required to either submit a final official statement to the EMMA system or disclose that no final official statement is being prepared. If no final official statement is being prepared, a preliminary official statement can be submitted. The underwriter must also disclose whether the issuer or any obligated persons have agreed to provide continuing disclosure information that’s required by SEC Rule 15c2-12.
If a financial advisor prepares an official statement on behalf of the issuer, the advisor must make the final form available to the managing underwriter promptly after the issuer approves its distribution. If the official statement is created as a printable electronic version, the financial advisor may deliver the electronic address and instructions for obtaining the printable version to the managing underwriter in order to satisfy the requirements of availability.

Question 7

Delivery of Official Statement to Customers

Answer 7

broker-dealers are also required to provide customers with either a copy of the final official statement or, if a final official statement is not being prepared, a written notice to that effect, along with a copy of a preliminary official statement by no later than the settlement date of the transaction. This must be done from the time the final official statement becomes available and continue until the earlier of 90 days from the end of the underwriting period or from the time when the official statement becomes available to the MSRB. In any case, this period cannot be less than 25 days from the end of the underwriting period.
As an incentive, if underwriters provide official statements to the MSRB, they will only be required to make them available for 25 days, rather than 90 days.

Question 8

Delivery of Official Statement to Customers

Via EMMA

Answer 8

a broker-dealer may send a notice to any customer who purchases a new issue of municipal securities which advises them how to obtain the official statement from EMMA. This notification can be provided in lieu of sending the official statement to a customer. However, the notice must state that a copy of the official statement will be provided by the broker-dealer on request. If the customer contacts the broker-dealer to request the official statement, it must be sent by first class mail within one business day of the request.

Question 9

municipal securities broker-dealer

official statement request

Answer 9

If requested, a municipal securities broker-dealer must promptly provide the final official statement to any municipal securities broker-dealer to which the securities were sold. The official statement must be sent by no later than the next business day. To ensure that copies of the final official statement are available to other broker-dealers, responsibility is placed on the managing underwriters and financial advisors to provide copies on a timely basis (as stipulated under SEC Rule 15c2-12.

Question 10

Delivery of Official Statement to Customers

additional Periodic Purchases

Answer 10

if they have already received a final official statement, the broker or dealer may sell additional shares to them and comply with the rules by sending supplements, amendments, or stickered portions of any new official statement that may be required. When required, the appropriate documents must be sent to the customer by no later than settlement of a transaction.

Question 11

New Issue Disclosure Period

Answer 11

to MSRB Rule G-32, the new issue disclosure period begins with the first submission to an underwriter of an order for the purchase of a new municipal bond or the purchase of these securities from the issuer. The period ends 25 days after the final delivery by the issuer of the new municipal bonds to the underwriter. This 25-day period is based on the prospectus delivery rule. However, it differs from SEC Rule 15c2-12 by requiring any dealer (not just an underwriter) to deliver a copy of the offical statement to any customer that has purchased a new issue municipal security during the disclosure period (regardless of whether it’s been requested by the customer).

Question 12

Dual Purchase Same address delivery rule

Answer 12

Under MSRB Rule G-32, as long as two or more customers share the same address, a dealer may satisfy its official statement delivery requirements by sending one copy of the document if:
 The dealer addresses the official statement to the group (for a fund or corporation) or by addressing the documents to both or all of the names of the clients
 The investors provide written consent to the delivery of one official statement
A firm is not required to obtain the written consent if both investors have the same last name or if the firm has reason to believe that the clients are members of the same family.

Question 13

Submission of Official Statements

Answer 13

All underwriters are required to submit official statements (OSs) and advance refunding documents (ARDs) in connection with primary offerings through the MSRB’s EMMA system. These documents must be submitted to EMMA in an electronic format (PDF). Under MSRB Rule G-32, the underwriter of a primary offering (new issue) of municipal securities is required to provide an official statement for that offering within one business day after the receipt of the official statement from the issuer or its designee. If the official statement for the offering hasn’t be submitted by the underwriter (due to the fact that the underwriter hasn’t received it from the issuer), the underwriter is required to submit a notice to EMMA that the official statement hasn’t yet been submitted, but that it will be as soon as it becomes available. In addition, Form G-32 must also be submitted by the managing underwriter within one business day after receiving the OS from the issuer, and within five business days after receiving the ARD from the issuer.

Question 14

Submission of Official Advance Refunding Documents

Answer 14

If the issuer advance refunds an outstanding issue of municipal securities, the advance refunding document, including CUSIP numbers, must be sent to the MSRB within five business days of delivery of the securities from the issuer to the underwriters.

Question 15

Records Creation

Answer 15

The following records and forms must be prepared by the managing underwriter in a primary offering of a municipal securities:

1. The name, par value, and CUSIP number(s) for each offering of municipal securities
2. The dates that the documents are received from the issuer and are sent to the MSRB
3. The date that the issue is delivered to the underwriters
4. The date that the underwriting agreement is signed
5. Copies of Form G-32

Question 16

amendments to the official statement

Answer 16

Within one business day, underwriters are required to submit to the MSRB any amendments to the official statement and a revised Form G-32 up until the 25th day after the settlement of the underwriting. After that period, the issuer is no longer required to update the official statement. Generally, official statements are not considered disclosure documents for bonds that trade in the secondary market.

Question 17

CUSIP application

time frame

Answer 17

Unless the issuer has already applied for cusips
For competitive offerings, the application must be made so that the assignment of CUSIP numbers is received by no later than the date of award. However, for negotiated offerings, the application must be made by no later than the day on which the contract to buy the securities from the issuer is executed (the day on which the purchase contract is signed).

Question 18

When filing an application for CUSIP numbers, the following information must be provided:

Answer 18

1. The name of the issue and series designation, if applicable
2. The interest rate(s) and maturity date(s)
3. The dated date (first day of interest accrual)
4. The type of issue (general obligation, revenue, etc.)
5. The type of revenue generated if the issue is a revenue bond
6. The details of any redemption provisions
7. Any other party that may be obligated to pay debt service on the issue (an issuer or other political subdivision)

Question 19

CUSIP PAYMENT CHANGES

Answer 19

If a municipal security that’s currently being traded in the secondary market is altered as to the payment of debt service, it must be assigned a new CUSIP number. The reason for this is that it’s no longer identical to its original issue

Question 20

Exemption from CUSIP Application

Answer 20

The requirements for CUSIP application don’t apply to any part of an outstanding maturity of a municipal that doesn’t qualify for CUSIP number assignment, or if the issue consists entirely of municipal fund securities.
Dealers that act as financial advisors to issuers of competitive offerings are responsible for ensuring that applications for CUSIP numbers are made with enough time so that they are assigned prior to the date of award.

Question 21

Under MSRB created Rule G-23, a financial advisory relationship exists

Answer 21

when a municipal securities broker or dealer gives, or enters into an agreement with an issuer to give, financial advisory or consultant services regarding the issuance of municipal securities. This includes a firm providing assistance to the issuer regarding the structure, timing, terms, or other similar matters.
advice as an issuer in it’s role as underwriter doesn’t qualify.

Question 22

Advisory Relationship

Written Agreement

Answer 22

There must be a written agreement between the two parties to evidence the fact that a financial advisory relationship exists. This agreement must be created either at, prior to, or promptly after the inception of the relationship. The written understanding should also include how the financial advisor will be compensated for its advisory services.

Question 23

Advisory Relationship

Underwriting Activities

Answer 23

A broker-dealer or municipal securities dealer that has a financial advisory relationship with an issuer is prohibited from acting as an underwriter with respect to the same issuer of municipal securities. The rule applies regardless of whether the issue is sold on a negotiated or competitive bid basis. The prohibition states that any firm that has a financial advisory relationship with respect to the issuance of municipal securities may not act in a principal capacity in a syndicate that’s formed for the purpose of purchasing securities from the issuer, or act in any agency capacity for the issuer in arranging the placement of its securities.

Question 24

Remarketing Agent

Answer 24

A broker-dealer or municipal securities dealer that has a financial advisory relationship is generally prohibited from acting as a remarketing agent with respect to the same issuer of municipal securities. However, a firm is permitted to serve as a successor remarketing agent for an issue if the financial advisory relationship had been terminated for a period of at least one year prior to the firm being selected as the remarketing agent

Question 25

Acting as an Underwriter

Answer 25

As stated earlier, a broker-dealer may provide advice to an issuer as long as it relates to the issuance of municipal securities in the capacity of an underwriter and not as a financial adviser. This includes advice regarding the structure, timing, and terms of the issue. In order for the firm to be considered an underwriter and not a financial adviser, it must clearly identify to the issuer at the earliest possible stage that it’s acting as an underwriter.

Question 26

Underwriter Conflicts of Interest

Answer 26

In its fair dealings with issuers, an underwriter is required to disclose both actual and potential conflicts of interest, such as:
 The underwriter’s interests are different than the issuers
 A fiduciary responsibility doesn’t exist between the underwriter and the issuer
 The underwriter’s obligation to purchase securities from the issuer at a fair and reasonable price must be balanced with its obligation to sell securities to investors at fair and reasonable prices

Question 27

underwriter’s compensation considerations

Answer 27

 The size of the issue
 The credit quality of the issue
 The market conditions at time of the issue
 The difficulty in structuring the issue
 Any other fees related to the underwriting

Question 28

Underwriter timing of confilct disclosures

Answer 28

Disclosures are required to be made at the time the relationship between the underwriter and issuer is initiated. Certain conflicts must be disclosed when merely discussing a potential underwriting, while other disclosures are made only after the underwriter/issuer relationship is formally established. The disclosures must be made in writing and sent to an official of the issuer who is able to legally bind the issuer to the underwriter. In addition, since some of the financing structures involve complex variable rate or derivative investments, the issuer’s representative must have the experience and knowledge to evaluate the risks associated with such structuring.

Question 29

Underwriter conflict disclosure acknowledgement

signature

Answer 29

Underwriters must attempt to receive written acknowledge of receipt of the disclosures. If the official of the issuer fails to provide written receipt, the underwriting may proceed only after specifically documenting the reason why written acknowledgement was not provided.

Question 30

Retail Order Period

Answer 30

Rule G-17 requires an underwriter that has agreed to underwrite a transaction with a retail order period to honor such agreement. During this period, only orders from retail customers will be accepted.
Furthermore, if a dealer places an order that’s represented as a qualifying retail order, but in fact the order doesn’t meet the qualification requirements of a retail order (e.g., an order by a retail dealer without “going away” orders from retail customers, when such orders are not within the issuer’s definition of “retail”), is in violation of Rule G-17 (the fair dealing rule

Question 31

A “going away” order

Answer 31

A “going away” order is one in which a customer is already conditionally committed.

Question 32

Retail Order Period Representations and Required Disclosures

Answer 32

From the end of the retail order period, but no later than the time of the formal award, each municipal securities dealer that submits an order during a retail order period to the senior syndicate manager or sole underwriter is required to provide (in either written or electronic form) the following information that relates to each designated retail order:
 Whether the customer order is one that meets the issuer’s eligibility criteria for participation in the retail order period
 Whether the order is from a customer who is already conditionally committed
 Whether the broker, dealer, or municipal securities dealer has received more than one order from such retail customer for a security which has the same assigned CUSIP number
 Any identifying information that’s required by the issuer or the senior syndicate manager on the issuer’s behalf (excluding customers’ names or Social Security numbers)
 The par amount of the order

Question 33

Date of Sale

Answer 33

In the case of competitive sales, the date of sale is the date on which all bids for the purchase of securities must be submitted to an issuer. In the case of negotiated sales, the date of sale is the date on which the contract to purchase securities from an issuer is executed.

Question 34

Priority Provisions

Answer 34

These are the provisions that are adopted by a syndicate and govern the allocation of securities to different categories of orders. The normal priority is presale orders, group orders, designated orders, and member orders at the takedown.

Question 35

Related Portfolio

Answer 35

A related portfolio is a municipal securities investment portfolio of a municipal securities broker-dealer or of any person directly or indirectly controlling, controlled by or under common control with a municipal securities broker-dealer (e.g., a bank dealer’s portfolio or trading account).

Question 36

Underwriting Period

Answer 36

The underwriting period begins with the first submission to a syndicate of an order for the purchase of new issue municipal securities or the purchase of the securities from the issuer, whichever occurs first. The underwriting period ends when the issuer delivers the securities to the syndicate or the syndicate no longer retains an unsold balance of securities, whichever occurs last.

Question 37

Accumulation Account

Answer 37

This is established in connection with the creation of a municipal securities investment trust. Securities are deposited into the accumulation account pending their deposit into the investment trust.

Question 38

Order Period

Answer 38

The order period is the period (if any) that’s announced by a syndicate during which orders will be solicited for the purchase of securities being held in the syndicate account.

Question 39

Qualified Note Syndicate

Answer 39

Under MSRB rules, a qualified note syndicate is defined as a syndicate that’s formed for the purpose of purchasing and distributing a new municipal issue that will mature in less than 24 months (two years). In addition, the new issue may not be purchased by the syndicate on an all-or-none basis, and the syndicate has stipulated that there’s no order period. Only group orders will be accepted, and the syndicate may buy or sell the securities for its own account.

Question 40

Syndicate

Disclosure of Capacity

Answer 40

Every syndicate member that submits an order to purchase municipal securities being held by the syndicate must disclose, at the time of submission, whether the securities are being purchased for:
 Its dealer account (for inventory)
 The account of a related portfolio
 A municipal securities investment trust that’s sponsored by the dealer, or
 An accumulation account that’s established in connection with a municipal securities investment trust

Question 41

Municipal Securities UIT

Answer 41

The underwriters of a municipal securities unit investment trust (UIT) collect bonds in an accumulation account pending the deposit of the bonds in the trust. (These bonds are mostly new issue municipal securities, but could be secondary market securities as well.) Once these bonds are deposited into a trust, it becomes a municipal securities unit investment trust.

Question 42

Priority Provisions

Answer 42

Every syndicate must establish priority provisions for orders. (The priority of orders which is described in Chapter 4 is customary, but not mandated by MSRB rules.) If these provisions are able to be changed, the syndicate must establish the procedure by which these change can be made.

Question 43

to allocate securities in a manner other than in accordance with the priority provisions

Answer 43

The syndicate agreement may contain a provision which permits the syndicate manager(s) to allocate securities in a manner other than in accordance with the priority provisions on a case-by-case basis. However, if the syndicate manager does invoke this right and allocates securities in a manner that’s different than the priority provisions, the manager must be able to justify that the new allocation is in the best interests of the syndicate.

Question 44

Prior to the first offer of any securities by a syndicate, the senior syndicate manager must furnish provide the other members of the syndicate the following information in writing:

Answer 44

 The priority provisions
 The procedure, if any, by which such priority provisions may be changed
 If the senior syndicate manager(s) are to be permitted, on a case-by-case basis, to allocate securities other than in accordance with priority provisions, the fact that they are to be permitted to do so
 If there’s to be an order period, whether orders may be confirmed prior to the end of the period

Question 45

Disclosure of Allocation of Securities

commitment wire

Answer 45

Within 24 hours of sending the commitment wire, the senior syndicate manager must complete the allocation of securities. However, if at the time of the allocation, the contract hasn’t been signed in a negotiated sale or the award hasn’t been made in a competitive sale, the allocations are made subject to the signing of the contract or the awarding of the bonds. All purchasers must be informed of this fact.

Question 46

Disclosure of Allocation of Securities

Answer 46

Within two business days from the date of sale, the syndicate manager must disclose in writing to the syndicate members a summary of the allocation of securities to orders which, under the priority provisions adopted by the syndicate, are entitled to a higher priority than a member’s “takedown” order. This includes any order that’s confirmed at a price other than the original list price. For each maturity that’s allocated, the summary must show the aggregate par value and price

Question 47

Disclosure of Allocation of Securities

date of sale 10 days

Answer 47

Within 10 business days following the date of sale, the syndicate manager must disclose in writing to each syndicate member all of the available information regarding designations that are paid to syndicate and non-syndicate members, expressed in total dollar amounts. All such information must again be disclosed to syndicate members with the sending of the designation checks.

Question 48

Disclosure of Allocation of Securities

date of sale 15 days

Answer 48

By the later of 15 business days after the date of sale or three business days following notice to the syndicate manager from the issuer, the manger must disclose in writing the amount of any portion of the takedown that’s directed to each member by the issuer.

Question 49

Disclosure of Group Orders

Answer 49

Every municipal securities dealer that submits a group order to a syndicate or to a member of a syndicate, must disclose the identity of the customer for whom the order is submitted and the time that it’s submitted.

Question 50

Disclosure of Allocation of Securities

Answer 50

At or prior to the final settlement of the syndicate account, the manager must give the syndicate members an itemized statement that shows the nature and amounts of all expenses which are incurred on behalf of the syndicate and a summary statement showing the following:
 The identity of members’ related portfolios to which securities have been allocated, as well as the aggregate par value and maturity date of each maturity that’s allocated
 The identity of each person who submits a group order to which securities have been allocated, as well as the aggregate par value and maturity date of each maturity that’s allocated
 The aggregate par values and prices (expressed in terms of dollar prices or yields) of all securities that are sold from the syndicate account

Question 51

Syndicate Settlement Practices

Answer 51

The settlement of a syndicate account and distribution of any profit that’s due to members must be made within 30 calendar days of delivery of the securities by the syndicate manager to the syndicate members.
Sales credits that are designated by a customer must be distributed within 10 calendar days following the date that the issuer delivers the securities to the syndicate.

Question 52

Underwriting Assessments

Answer 52

Syndicate members must pay an underwriting fee to the MSRB for certain issues of municipal securities. The syndicate manager, also referred to as the book running manager or senior syndicate manager, pays the fee on behalf of each participant in the syndicate. No part of any of the underwriting fees may be passed on to an issuer. In other words, members pay the fee, not customers or issuers.
All offerings that are subject to the rule are assessed at a rate of .00275% ($.0275 per $1,000) of par value. The MSRB invoices managing underwriters for all underwriting assessments that are due and payment must be made within 30 calendar days after the date the invoice is sent.

Question 53

Underwriting Assessments

Exemptions

Answer 53

Both commercial paper (municipal securities that have maturities of nine months or less) and municipal fund securities are exempt from the underwriting assessments

Question 54

municipal finance professional (MFP).

Answer 54

• Any associated person who is primarily engaged in the activities of a municipal securities representative, such as underwriting, trading, sales, financial advisory or consulting services (to issuers), research, or investment advice regarding municipal securities
  A retail salesperson is not considered an MFP solely based on her municipal securities sales activities.
• Any associated person who solicits municipal securities business, even if it’s only a small part of her activities. Even something as simple as attending a presentation that a municipal securities firm makes to a potential issuer regarding the firm’s public finance capabilities could be interpreted as a solicitation and result in a representative being classified as an MFP.
• Direct supervisors of these associated persons
• Any member of the executive or management committee of a dealer or of a separately identifiable department of a dealer bank. For MFP’s that meet this definition, as well as the direct supervisors, the ban on business only applies to contributions that are made during the six months prior to the individual becoming an MFP.

Representatives continue to be classified as MFPs for one year following the activity that initially gave rise to the designation.

Question 55

Political Contributions

Ban on Business

Answer 55

Municipal securities firms are prohibited from engaging in specified municipal securities business with issuers for two years if certain political contributions are made to officials of those issuers. The political contributions that are referred to by the rule include those made by:
 The municipal securities firm
 Any of the firm’s municipal financial professionals (MFPs)
 Any political action committee (PAC) that’s controlled by the firm or an MFP

Question 56

Political Contributions

Exceptions

Answer 56

Any person who is classified as an MFP can make certain contributions without triggering the two-year ban if the following two requirements are met:

1. The MFP must be entitled to vote for the official, and
2. The contribution cannot exceed $250 per election

It’s important to emphasize that the exception is based on the election cycle. In other words, if an issuer official is involved in a primary election prior to the general election, an MFP who is entitled to vote for the official can contribute $250 to both the issuer official’s primary and general election

Question 57

Political Contributions

Look Back

Answer 57

A two-year look-back period applies to contributions made by municipal finance professionals. If an individual is not an MFP and has made contributions to a political candidate that would have resulted in a violation, the individual’s employing firm is subject to the underwriting ban if the individual is employed in the role of an MFP within two years of the contribution

Question 58

Political Contributions

Failed Election

Answer 58

An official of an issuer (i.e., a governor or mayor) is seeking re-election and an MFP who’s entitled to vote for this official contributed $250. This official ultimately loses the election, is out of office, and is now soliciting money to pay debt incurred in connection with the election. The MFP can still give money to this person without triggering the ban since the person is out of office and is no longer an official of the issuer.

Question 59

Political Contribution

Joint account

Answer 59

If a contribution to a political candidate is made from a joint checking account, the contribution is viewed as being split evenly by the contributors and the contribution limit applies. Therefore, if the check from the joint account exceeds $500, a violation occurs. If the check is signed by only the MPF, the entire amount is attributable to the MFP.

Question 60

Political Contribution

Spouse

Answer 60

If the spouse of an MFP made a contribution by writing a check from a personal (rather than joint) account, the contribution is not viewed as originating from the MFP. In this case, there’s no limit on the amount the spouse can contribute under this MSRB rule.

Question 61

Political Contribution Ban

Application for Exemption

Answer 61

 Prior to the time the contribution(s) was made which resulted in the prohibition, had developed and instituted procedures that were reasonably designed to ensure compliance with this rule.
 Prior to or at the time the contribution(s) was made which resulted in the prohibition, had no actual knowledge of the contribution(s)
 Has taken all available steps to cause the person(s) who was involved in making the contribution(s) which resulted in the prohibition to obtain a return of the contribution(s)
 Has taken other remedial or preventive measures, as may be appropriate under the circumstances
 The nature of the remedial or preventative measures that are taken toward the contributor and all employees of the dealer
 Whether, at the time of the contribution, the contributor was an MFP, an employee of the dealer, or seeking such employment
 The timing and amount of the contribution
 The nature of the election (local, state, or federal)
 The contributor’s apparent intent or motive in making the contribution, as evidenced by the facts and circumstances of the contribution

Question 62

Political Contribution Ban

Automatic Exemption Provision

Answer 62

Dealers are allowed to execute two exemptions per 12-month period for contributions that are made by an MFP of $250 or less if the dealer discovers the contribution within four months of the date of the contribution and the contributor obtains a return of the contribution within 60 calendar days from the date that the dealer discovered the contribution.
Reported on Form G-37

Question 63

Political Contribution Ban

Volunteer Work

Answer 63

Volunteer activity will not violate the political contribution rules since an MFP can volunteer his time on behalf of an official of the issuer. However, the MSRB does recommend that the MFP donate his time during non-work hours. In addition, personnel expenses that are incurred during volunteer work (e.g., cab fare or personal meals) will not be defined as a contribution.

Question 64

Reporting Related to Political Contributions

Answer 64

Firms must submit reports on contributions to officials of issuers and on payments to political parties of states and political subdivisions. Form G-37 must be submitted to the Board for a calendar quarter if any one of the following occurred:
Reportable political contributions or payments to political parties were made during the reporting period, unless the firm had previously submitted form G-37(X) (discussed shortly) and the submission remains in effect.
 The dealer engaged in municipal securities business during the reporting period, or
 The dealer used consultants during the reporting period.

Question 65

G-37 Filing Date

Answer 65

Two copies of these reports must be sent to the Board on Form G-37 by the last day of the month following the end of each calendar quarter and must include:
 The name and title of each official of an issuer and political party that received contributions or payments
 The amount of the contribution or payment made and the contributor category (e.g., the firm, each MFP, each non-MFP executive officer, each PAC controlled by the firm) of the persons and entities involved
 A list of issuers with which the dealer has engaged in municipal securities business, along with the type of municipal securities business.

Question 66

Records Concerning Political Contributions and Prohibitions of Municipal Securities Business

Answer 66

For a period of six years, every broker, dealer, and municipal securities dealer must keep current records that reflect:
 A listing of the name, title, and address of all municipal finance professionals and executive officers
 States in which the firm intends to do municipal business
 A listing for the current year of issuers with which the firm has done business, and in what capacity, as well as separate listings for the last two calendar years
 The amounts, dates, and identities of contributors (this includes MFPs, any PAC controlled by an MFP, and non-MFP executive officers) for all contributions, direct or indirect, to officials of an issuer, as well as to political parties of states and political subdivisions
 Forms G-37 that have been sent to the Board, along with proof of mailing

Question 67

Political contribution definition

Solicitation

Answer 67

Solicitation is defined as any direct or indirect communication by any person with an issuer for the purpose of obtaining or maintaining municipal securities business.

Question 68

Political contribution definition

Affiliated Person

Answer 68

An affiliated person is considered a partner, director, officer, employee, or registered person of a firm. In the case of a bank dealer, it includes any person who has a similar status or performs similar functions. Also considered affiliated are other companies that directly control, are controlled by, or are under common control of the municipal securities firm.

Question 69

Political contribution definition

Answer 69

 The purchase of a primary offering from an issuer on a negotiated basis. Competitive bid allocations are excluded from the definition.
 The offer or sale of a primary offering of municipal securities on behalf of any issuer, including public offerings and private placements.
 If a municipal securities firm provides financial or advisory services to an issuer or on behalf of the issuer in a primary offering, the firm is engaged in municipal securities business.

Question 70

Suitability of Recommendations and Transactions (G-19)

Answer 70

These recommendations must be based on information that’s obtained from the customer and then used to identify her investment profile. A customer’s investment profile includes the following items:
 Age
 Other investments
 Financial situation and needs
 Tax status
 Investment objectives and experience
 Investment time horizon
 Liquidity needs
 Risk tolerance
 Any other information that’s been obtained from the customer

Question 71

The MSRB has established the following three main suitability obligations:

Answer 71

1. The Reasonable-Basis Obligation – Requires a member firm and its RRs to have a reasonable basis to believe that a recommendation is suitable for at least some investors. If the firm or its RRs don’t understand a product, it shouldn’t be recommended to customers.
2. The Customer-Specific Obligation – Requires a member firm and its RRs to have a reasonable basis to believe that a recommendation is suitable for a particular customer based on the customer’s investment profile.
3. The Quantitative Obligation – Requires a member firm and its RRs to have a reasonable basis to believe that a series of recommended transactions, even if they are suitable for a customer, are not excessive when considering the customer’s investment profile.

Question 72

Customer’s Financial Ability

Answer 72

The rule prohibits a firm from recommending a transaction or investment strategy involving municipal securities, or the continuing purchase of municipal securities, or use of an investment strategy that involves municipal securities unless the firm has a reasonable basis to believe that the customer has the financial ability to meet such a commitment.

Question 73

There are situations in which the MSRB’s suitability rule doesn’t apply.

Answer 73

the MSRB doesn’t consider the following to be recommendations:
 Basic investment concepts, such as risk and return and diversification
 Historic differences in the return of asset classes based on standard market indices
 Effects of inflation
 Estimates of future retirement income needs
 Assessment of a customer’s investment profile
 General comparisons between tax-exempt and taxable bonds and the concept of tax-equivalent yield.

Question 74

Time of Trade Disclosures (G-47)

Answer 74

The time of trade disclosures are required to be made at or prior to the time of the trade. The disclosures may be made orally or in writing and apply regardless of whether the transaction is recommended or unsolicited, occur in the primary or secondary market, or is a principal or agency transaction.
Some of the required disclosures include:
 Features of VRDOs or ARS
 Credit risk or rating
 Credit or liquidity enhanced securities
 Insured securities
 Tax treatment of an OID
 Call features, put options, and tender options
 Use of the bond’s proceeds
 The fact that the issuer has failed to make the filings under the continuing disclosure agreements

Question 75

Transactions with SMMPs (G-48)

Answer 75

Certain MSRB rules have different implications for sophisticated municipal market professionals, including:
 Time of trade disclosures don’t apply to SMMPs
 Transactional pricing, which is described in Rule G-30, have the following guidelines for SMMPs:
– Dealers don’t have an obligation to obtain a fair and reasonable price if the transactions are non-recommended secondary market agency transactions, or if the dealers have been explicitly limited to providing anonymity, communication, order matching, and/or clearance functions and don’t exercise discretion as to how or when the transactions are execute
 The customer suitability requirements under Rule G-19 don’t apply to SMMPs
 The best execution standards (described later) under Rule G-18 don’t apply to SMMPs

Question 76

Disclosure of Control Relationships (G-22)

Answer 76

If a control relationship exists between an issuer of securities and the municipal securities dealer that’s distributing the securities, the client must specifically authorize any trade. In addition, if a control relationship exists, all clients must receive disclosure of the relationship before engaging in a trade for that issue. The disclosure must be confirmed in writing either at or before the completion of the transaction. Sending an email is an acceptable method of making disclosure.

Question 77

Transactions with Employees and Partners of Other MSRB Members (G-28)

Answer 77

A firm may not open accounts for persons who are either employees or partners of an MSRB firm unless they observe the rules of the MSRB regarding such accounts. The following rules also apply if the firm opening the account knows the customer is the spouse or minor child of an employee or partner of another municipal securities firm. To open and maintain this type of an account:
 The firm opening the account must give written notification to the employing firm that it intends to carry the account. The employing firm will then forward any special instructions or restrictions that must be followed.
 The firm carrying the account must send duplicate confirmations for all transactions that are made in the employee’s account to the employing firm.

Question 78

Customer Account Transfers (G-26)

Answer 78

MSRB rules specify the procedures to follow when a customer intends to transfer an account from one municipal securities firm to another. Both the dealer that carries the account (referred to as the carrying party) and the dealer that’s receiving the account (the receiving party) are responsible for coordinating and expediting a customer’s request to transfer the

It’s important to note that if both parties are direct participants in a clearing agency that’s registered with the SEC which offers automated account transfer capabilities, the parties must transfer the account under the rules of the clearing agency, rather than the following rules.account.

Question 79

Transfer Instructions

Answer 79

Transfer instructions may be sent on MSRB Form G-26 or other forms that are required by a registered clearing agency. The receiving party then must immediately forward the transfer instructions to the carrying party.
Within one business day of receipt of the transfer instructions, the carrying party must validate and return the instructions to the receiving party or protest the transfer.

Question 80

Transfer Instructions

Examining Authority

Answer 80

Note: A copy of the transfer instructions must be forwarded to the enforcement authority (i.e., the SEC, FINRA, FRB, FDIC, or Comptroller of the Currency) that has jurisdiction over the carrying party, at the request of the authority.

Question 81

Protesting a Transfer

Answer 81

If the transfer is protested, the carrying and receiving parties must promptly resolve their differences. A carrying party may protest a transfer only if:
 It has no record of the account on its books
 The transfer instructions are incomplete, or
 The transfer instructions contain an invalid signature

Question 82

Validating a Transfer

Answer 82

When validating transfer instructions, the carrying party must freeze the account and cancel all outstanding orders. Attached to the validated transfer instructions must be a listing of all positions, money balances, and current market values for all of the assets in the account, as well as a description of the securities being transferred that don’t have CUSIP numbers
Within three business days following the validation, the carrying party must complete the transfer of the account to the receiving party.