Chapter 7 Study Notes P2

Question 1

Guarantees

Answer 1

A member may not guarantee or offer to guarantee a customer against loss. This prohibition is an anti-manipulation rule which is primarily designed to prevent a municipal securities dealer from artificially stimulating the market in a security by “parking” it in the account of a customer who has assumed no market risk.
Put options and repurchase agreements are not considered guarantees against loss if the terms are stated in writing to the customer either with or on the confirmation of the transaction and recorded on the firm’s books.

Question 2

A put option

Answer 2

A put option is a contract that’s purchased by the client which may or may not be exercised. A put option doesn’t guarantee against loss; instead, it’s simply the opportunity to sell a specific security at a stated price for a certain period.

Question 3

A repurchase agreement

Answer 3

A repurchase agreement usually begins with the client being long cash and the firm being long a security. The client wires funds to the firm and, in return, is sent securities as collateral for the loan. This procedure is not considered a guarantee against a loss.

Question 4

Sharing in Profits and Losses

Answer 4

An MSRB firm is not permitted to share in the profits or losses of its clients. However, this doesn’t prevent an associated person from participating, in a private capacity, in an investment partnership or joint account with a client. To be permitted, the participation must be solely in direct proportion to the financial contribution made by the associated person to the partnership or account.

Question 5

Use of Ownership Information Obtained in a Fiduciary or Agency Capacity (G-24)

Answer 5

According to MSRB rules, the member firm may use this information for its own benefit if it first obtains the permission of the issuer. This rule aims to prevent abuses in acquiring and using information concerning the ownership identity of municipal securities.

Question 6

Advertising (G-21)

Answer 6

All advertising that’s published by municipal securities firms must be truthful and not misleading. An advertisement is defined as any material (other than a firm’s offering list) that’s published or designed for use in the public media, or any promotional literature that’s designed for dissemination to the public, including any notice, circular, research report, market letter, form letter, telemarketing script, or reprint or excerpt of these items.

Question 7

advertising yields and rates

Answer 7

If it represents the yield, it must indicate the basis on which it’s calculated (e.g., discount, par, or premium securities and, for discount securities, whether it’s indicating the before-tax or after-tax yield).

Question 8

New Issue Advertisements

Yields

Answer 8

MSRB rules permit a syndicate to publish an advertisement that shows the initial reoffering prices or yields for the securities, even if they have since changed, as long as the ad contains the date of sale of the securities by the issuer to the syndicate. In this rule, date of sale means:
 For competitive issues – the date on which bids are required to be submitted to the issuer
 For negotiated sales – the date on which a contract to purchase the securities from the issuer is executed
If the syndicate chooses to advertise prices or yields other than the initial reoffering prices or yields, they must be current as of the time the ad is submitted for publication.

Question 9

Any advertising that’s related to municipal fund securities must include a statement which:

Answer 9

1. Advises an investor to consider the investment objectives, risks, and charges before investing
2. Explains that more information about municipal fund securities is available in the issuer’s official statement
3. Indicates that the dealer publishing the ad is an underwriter of the municipal fund securities
4. States that the official statement should be read carefully before investing

Question 10

If the advertisement refers to the municipal fund security by name, the issuer, or the state or governmental entity that sponsors the municipal fund securities, additional disclosures must be included. Among these disclosures are:

Answer 10

1. If the issuer hasn’t produced the official statement, the source from where it may be obtained
2. If related to an IRS Section 529 plan, a statement that advises an investor to consider, before investing, whether the investor’s or beneficiary’s home state offers any state tax or other benefits that are only available for investments in the state’s qualified tuition program
3. If the municipal fund security has characteristics of a money market fund, statements to the effect that an investment in the security is not guaranteed by the FDIC or any other governmental agency

Question 11

Approval of Advertising by a Principal

Answer 11

Each advertisement must be approved in writing by a Municipal Securities Principal (Series 53) or a General Securities Principal (Series 24) prior to first use. Every firm must make and keep current, in a separate file, records of all advertisements. A Municipal Fund Securities Limited Principal (Series 51) may approve advertising, but only if it’s related to municipal fund securities (529 plans).

Question 12

Supervisory Responsibilities (G-27)

Answer 12

MSRB member firms must designate, in writing, one or more principals as responsible for supervising municipal securities activities.
The designated principal must promptly review and approve in writing each of the following:
 The opening of customer accounts
 Transactions in municipal securities
 The handling of all written customer complaints that pertain to transactions in municipal securities
 All correspondence that pertains to the solicitation or execution of transactions in municipal securities
It’s also necessary for the designated principal to regularly and frequently examine all customer accounts that are introduced or carried by the firm in order to detect and prevent irregularities and abuses.

Question 13

MSRB Supervisor Location/review

Answer 13

MSRB rules don’t require the person who’s responsible for supervising the municipal securities activities of a branch office to be physically located at the branch. Review of branch offices is required to be conducted on a periodic basis.

Question 14

Quotations (G-13)

Answer 14

A quotation means a bid for, offer of, request for bid, or request for offer of municipal securities. A broker-dealer may only publish or distribute a quotation if it’s a bona fide quote. A quote is bona fide if the broker-dealer stands ready to effect the transaction at the price that’s quoted at the time the quotation is given.

Question 15

Informational Quotes

Answer 15

A broker-dealer is permitted to give a quotation for informational purposes only as long as the quote is identified as such. This includes subject, workout, and nominal quotes.

Question 16

Multiple Markets in the Same Security

Answer 16

Occasionally, firms participate together in joint accounts for the purpose of selling municipal securities in an arrangement that’s referred to as a secondary market trading account. For example, two municipal securities firms may buy a large block of an existing municipal issue and alter the quality of the bonds by insuring them. The firms will then sell the credit-enhanced bonds from the joint account.
A joint account is allowed to have only one price at which it’s offering a specific security at a particular time. Participants in joint accounts are prohibited from distributing or publishing different quotations for the same security. To do so causes prospective buyers to perceive the separate offerings as being competitive and would draw buyers to the lower of the offerings.

Question 17

Quotes for a Second Party

Answer 17

A dealer is permitted to disseminate quotes for a person other than itself, including customers, other dealers, and sophisticated municipal market professionals (SMMPs). Generally,if a dealer disseminates a quote for another party and doesn’t label it as such, it’s presumed to be made by that dealer. If the quotation is labeled as belonging to another party, then it’s presumed not to be a quotation being made by the disseminating dealer.

Question 18

Best Execution (G-18)
Measurements

Answer 18

 The general character of the market in which the security trades (e.g., the price, volatility, and relative liquidity)
 The size and type of transaction
 The information reviewed to determine the current market for the subject security or similar securities
 Accessibility of the quotation, and
 The terms and conditions of the customer’s inquiry or order, including any bids or offers that result in the transaction, as communicated to the dealer

Question 19

Interpositioning

Answer 19

When a dealer executes any transaction with an existing customer or a customer of another dealer and inserts a third party between the customer and the best market, it’s generally referred to as interpositioning. Interpositioning is specifically prohibited if it’s a detriment to the customer; however, if the customer actually receives a better price, there’s no violation. The lack of sufficient personnel to effectively execute an order is NOT a suitable reason for interpositioning and failing to obtain the best price for a customer. Although the rule doesn’t prohibit the use of a broker’s broker for execution purposes, it does require the dealer to show why it was reasonable.

Question 20

Execution of Customer Transactions

Answer 20

Taking into account current market conditions, a dealer is required to make every effort to execute customer transactions promptly. A dealer is permitted to use more time to execute a transaction if it believes that the delay will be advantageous for the customer

Question 21

Best Execution and Executing Brokers

Executing against dealers quote

Answer 21

A dealer’s duty to provide best execution in any transaction, either for or with a customer of another dealer, doesn’t apply when the other dealer is simply executing a customer transaction against the dealer’s quote (i.e., a market order). A dealer’s duty to provide best execution to customer orders that are received from other dealers arises only when a customer order is routed from another dealer to the dealer for handling and execution.

Question 22

Securities with Limited Quotations or Pricing Information

Best execution

Answer 22

the best execution obligation requirements are different for customer transactions that involve securities for which there’s limited pricing information or quotations available

The MSRB requires each dealer to have written policies and procedures in place that address how the dealer will make its best-execution determinations when a transaction involves a security that lacks pricing information or multiple quotations. Additionally, the dealer must document its compliance with those policies and procedures. Some of the recommended methods include contacting other sources of pricing information or finding other means of liquidity.

Question 23

Customer Routing Instructions

Answer 23

In some circumstances, a customer (typically an institutional investor) will direct a dealer to route an order to a specific market for execution. These unsolicited instructions provide the dealer with an exemption from the best execution obligations for that specific order; however, the customer’s order must still be executed promptly.

Question 24

Review of Policies, Procedures and Execution

Answer 24

At a minimum, a dealer must conduct annual reviews of its policies and procedures for the purposes of determining the best available market for the executions of its customers’ transactions.
These best execution obligations do NOT apply to transactions involving:
 Municipal fund securities (529 plans)
 Sophisticated municipal market professionals (SMMP)

Question 25

Broker’s Broker (MSRB Rule G-43)

Answer 25

The rule focuses on the role broker’s brokers play in bid-wanted auctions or offerings, as well as the responsibility bidders have under the MSRB’s fair pricing rules.
Unless otherwise indicated, broker’s brokers are generally considered to be acting on behalf of sellers and should do their best to obtain prices that are fair and reasonable in relation to prevailing market conditions. Broker’s brokers are required to employ the same care and diligence in doing so as if the transactions were being done for their own account.

Question 26

Policies and Procedures for Bid-Wanted Auctions

Answer 26

1. The broker’s broker must disclose the maximum commission that may be charged on a given transaction.
2. If the winning high bid or next best bid (i.e., cover bid) in a bid-wanted auction has changed, the seller must be notified of both the original and changed bid.
3. If a broker’s broker allows customers or affiliates to place bids, it must provide written disclosure of this fact. Also, disclosure to both sellers and bidders is required if the high bid in a bid-wanted or offering is from a customer or an affiliate of the broker’s broker. The name of the customer or affiliate is not required to be disclosed.
4. Bids will be tested to determine if they represent fair market value.
5. Bidders will not be given preferential treatment. Broker’s brokers are prohibited from providing specific bidders with a “last look” or suggesting that their bid should be changed.
6. Prohibiting a broker’s broker from changing a bid price or offer price without the permission of the respective bidder or seller.
7. Prohibiting a broker’s broker from failing to inform the seller of the highest bid in a bid-wanted or offering.
8. Prohibiting any person other than the seller and the winning bidder from receiving information about bid prices before the bid-wanted auction has been completed. The seller may receive information on all bids; however, the winning bidder may only be notified that its bid is the winning bid.

Question 27

Duties of Bidders

Answer 27

Bidders are responsible for submitting bids that represent the fair market value based on the current market conditions. The concern is that bids are occasionally placed solely for price discovery—in other words, they are throw-away bids.

Question 28

throw away bids

Answer 28

throw away bids are placed below the fair market value and are a violation of Rule G-13 (the rule that prohibits a dealer from publishing a quote that’s not at fair market value).

Question 29

Duties of Sellers

Answer 29

A dealer that represents a seller of municipal securities also has an obligation to obtain a fair and reasonable price. When acting in a principal capacity, the dealer is prohibited from buying the securities from the seller at a price that’s not fair and reasonable. Under Rule G-43, a broker’s broker is required to notify the seller when a bid is below the predetermined parameters (based on the yield curve, recent trades reported, and bid-wanteds). Although situations may arise in which a customer may need to liquidate his municipal securities quickly, the dealer must discuss with the customer that taking additional time may result in an improved price.

Question 30

Alternative Trading System (ATS)

Answer 30

An alternative trading system is an electronic venue for matching the buy and sell orders of its subscribers. An ATS is exempt from the MSRB’s broker’s broker definition which allows the system to operate without the need to comply with MSRB Rule G-43. In order to receive this exemption, an alternative trading system must:
 Be registered with the SEC under Regulation ATS
 Only utilize automated and electronic means to communicate with bidders and sellers
 Ensure that all of its customers are sophisticated municipal market professionals (SMMPs)
 Adopt policies and procedures that, at a minimum:
− Require the ATS to disclose the nature of its undertakings for the seller and bidders in bid-wanteds and offerings
− Require the ATS to disclose the manner in which it will conduct bid-wanteds and offerings
− Prohibit the ATS from engaging in the conduct prohibited under Rule G-43 regarding the use of a broker’s broker by dealers

Question 31

Broker’s Broker

Record Retention

Answer 31

6 years
 All bids to purchase municipal securities together with the time of receipt
 All offers to sell municipal securities with the time the broker’s broker first received the offering
 The time that the high bid is provided to the seller, the time the seller notifies the broker’s broker that it will sell the securities at the high bid, and the time the trade is executed
 A copy of the policies and procedures that are required under Rule G-43
 The date and time of all the communication required under Rule G-43

Question 32

Record Retention

Alternative Trading Systems

Answer 32

6 years
An alternative trading system must maintain the following records with respect to its municipal securities activities:
 For all changed bids, the full name of the person at the bidder firm that authorized the change, as well as the full name of the person at the ATS at whose direction the change was made
 A copy of the policies and procedures that are required under Rule G-43

Question 33

Prices and Commissions

Principal Transactions

Answer 33

These principal transactions must be executed at an aggregate price (including any markup or markdown) that’s fair and reasonable.

Question 34

Prices and Commissions

Agency Transactions

Answer 34

a firm is required to both make a reasonable effort to execute the transaction for its customer at a price that’s fair and reasonable in relation to prevailing market conditions and charge a customer a commission or service charge that’s fair and reasonable.

Question 35

Factors When Charging an Aggregate Price (Principal Transaction)

Answer 35

In a municipal securities principal transaction, the most important factor in determining whether the aggregate price to a customer is fair and reasonable is ensuring that the yield is comparable to the yield on other securities of comparable quality, maturity, coupon rate, and block size that are available in the market.

Question 36

Factors When Charging a Commission or Service Charge (Agency Transaction)
Things to consider when charging the commission

Answer 36

 The availability of the securities involved in the transaction
 The expense of executing or filling the customer’s order
 The value of the services rendered by the dealer
 The amount of any other compensation received or to be received by the dealer in connection with the transaction
 The dealer’s entitlement to a profit
 The total dollar amount and price of the transaction
 The best judgment of the dealer concerning the fair market value of the securities when the transaction occurs and of any securities that are exchanged or traded in connection with the transaction

Question 37

prevailing market price.

contemporaneous cost

Answer 37

The prevailing market price of a debt security is its contemporaneous cost or contemporaneous proceeds. A dealer’s cost (proceeds) is contemporaneous when its inventory purchase and subsequent resale to a retail customer occur in close time proximity.

Question 38

contemporaneous cost

calc if no internal transaction

Answer 38

1. Prices of contemporaneous interdealer transactions in the same security
2. Prices of contemporaneous dealer transactions with institutional customers in the same security (in the absence of factor 1)
3. For actively traded securities, the dealer may use the contemporaneous quotes of the same security (in the absence of factors 1 and 2)

Question 39

alternatives to contemporaneous cost

Answer 39

Similar Securities

Economic Models

Question 40

In summary, the pricing of debt instruments is prioritized as follows:

Answer 40

 The contemporaneous price of a dealer
 The contemporaneous price of a similar security
 The price based on a pricing model

Question 41

Reports of Sales or Purchases (G-14)

Answer 41

Firms must report to the Board information about its transactions in municipal securities. The transaction information that’s collected is used to make public reports of market activity and prices and to assess transaction fees. This serves to make the municipal securities market more transparent—participants can verify the securities that are trading and their prices.

Question 42

Real-Time Reporting Transaction System (RTRS)

Answer 42

Transactions that are reported to the system will be made available to registered securities associations and to other appropriate regulatory agencies in order to assist in compliance and enforcement of MSRB rules. Brokers and dealers have an obligation to report trade information promptly, accurately, and completely. If a broker or dealer uses another agent for reporting purposes, the responsibility for timely and accurate reporting still lies with the firm that executed the trade.

Question 43

Time of Operation

RTRS

Answer 43

The RTRS is operated by the MSRB and is open each business day from 7:30 a.m. until 6:30 p.m. Eastern Time.

Question 44

Transactions not reported to RTRS

Answer 44

The following transactions don’t need to be reported to RTRS:
 Transactions in securities without CUSIP numbers
 Transactions in municipal fund securities
 Inter-dealer transactions that are not inter-dealer transactions eligible for comparison in a clearing agency that’s registered with the Commission

Question 45

Reporting Time Frame

Answer 45

The RTRS portals will be open for data transmission beginning 30 minutes prior to the opening of the business day and will remain open for 90 minutes after the end of the RTRS business day. Unless an exception is available, all transactions must be reported within 15 minutes of the time of trade. Any transaction that’s executed outside of the hours that RTRS is open must be reported by no later than 15 minutes after the beginning of the next business day.

Question 46

RTRS 15 minute exception

Answer 46

In some cases, the 15-minute reporting requirement is waived. Other reporting requirements are established for the following conditions:
1. On the first day of trading at the offering price of a new issue (referred to as list offering price/ takedown transactions), syndicate and selling group members will report transactions by the end of the day.
2. Dealers that execute trades in short-term instruments (under nine months to maturity, such as variable rate instruments, auction rate instruments, and commercial paper) may report the trades by the end of the day.
3. Dealers may report trades within three hours of execution under the following conditions:
a. CUSIP numbers and indicative data of the issues being traded are not in the securities master file that’s used by the dealer to process the trade.
b. The dealer hasn’t traded the issue in the previous year and the dealer isn’t the manager or a member of an underwriting syndicate.
Additionally, if there’s less than three hours left in the RTRS business day, the trade can be reported by no later than 15 minutes after the beginning of the next RTRS business day.

Question 47

Inter-Dealer Transactions

Reporting Portals

Answer 47

The MSRB has designated three RTRS Portals for dealers to use when they submit transaction information. The methods used may be:

1. The message-based trade input portal. This method may be used for any trade record submission or trade record modification.
2. The RTRS Web-based trade input method. This system is operated by the MSRB and may be used for low volume transactions reports or modifications, but cannot be used for submitting or amending inter-dealer trade comparisons.
3. The NSCC Real-Time Trade Matching (RTTM) portal. This method is used only for submitting or modifying data with respect to inter-dealer transactions that are eligible for comparison.

Question 48

The following information is reported on inter-dealer trades to RTTM

Answer 48

The information is referred to as match data,
 Accrued interest
 Buy/Sell indicators
 Concession
 Contraparty to the transaction
 Reasons for rejecting a trade (DK reason)
 CUSIP number(s)
 Type of issue
 Trade indicator (Locked-in, Demand, Bilateral, etc.)
 Market of execution
 Participant ( buyer or seller)
 Price (dollar amount or yield)
 Quantity
 Record type (Modify, Cancel, DK, etc.)
 Reversal indicator (If the report is reversing a trade)
 Settlement date and amount
 Settlement date adjustment (if using an extended settlement)
 Trade date and time (time is not a match data item)
 Trade type (Locked-in, Regular-way, New Issue, etc.)

Question 49

Reporting Non Intra dealer transactions

Answer 49

Dealers must report transactions with other firms to the National Securities Clearing Corporation (NSCC) within a prescribed time so that trades can be compared. Transaction information may be submitted directly to the NSCC or through a clearing broker-dealer. In addition to the information required by the NSCC, the MSRB requires firms to include the following in their reports:
 Time that the trade was executed
 Identity of the executing broker
 Identity of the entity that clears the transaction

Question 50

Customer Transactions

Items to be reported

Answer 50

Dealers must report transactions with customers to the MSRB and information required to be reported includes the:

1. CUSIP number of the security
2. Trade date
3. Time that the trade was executed
4. Executing broker symbol (This identifies the firm that executed the transaction.)
5. Par value traded
6. Dollar price of the transaction (excluding commission)
7. Yield of the transaction
8. Capacity in which the firm acted (as agent for the customer or principal)
9. Commission, if any
10. Settlement date, if known
11. Control number (This identifies the transaction.)
12. Symbol indicating whether the trade had previously been reported to the Board and, if so, the control number

Question 51

Transaction Assessments

Answer 51

Firms must pay the Board an assessment or fee that equals .001% ($.01 per $1,000) of the total par value of municipal securities sales that are reported to the Board for both inter-dealer sales and customer sales. When one dealer provides transaction reporting for another dealer, the firm reporting the transaction is responsible for the fee. The

Question 52

Technology Fee

Answer 52

The MSRB will also charge municipal securities broker-dealers a technology fee. The fee is $1.00 per transaction and applies to both inter-dealer and customer sales. There are no exemptions from this fee.

Question 53

Short-Term Obligation Rate Transparency (SHORT) System

Answer 53

The MSRB created the Short-Term Obligation Rate Transparency System to collect and disseminate information concerning variable rate demand obligations (VRDOs) and auction rate securities (ARSs).
Municipal securities dealers are required to submit information concerning these securities through the SHORT System by no later than 6:30 p.m. of the business day on which the auction occurs or that the rate is reset (for VRDOs). The MSRB’s Electronic Municipal Market Access (EMMA) System receives the information from the SHORT System and, therefore, the public is provided access free of charge.

Question 54

Customer Confirmations

Answer 54

 Name, address, and telephone number of the firm
 Name of customer
 Designation of whether the transaction is a purchase from, or a sale to, the customer
 Par value of the securities
 Description of the securities, including the name of the issuer, maturity date, and interest rate
 CUSIP number (if any) that’s assigned to the security
 Trade date
 Time of execution or a statement that the time will be furnished upon written request of the customer
 Settlement date
 Yield and dollar price
 If the interest is subject to federal income tax or the alternative minimum tax, a statement of that fact
 Amount of accrued interest
 Extended principal amount
 Total dollar amount of the transaction
 The capacity in which the firm acted (whether as principal, agent for the customer, agent for a person other than the customer, or agent for both the customer and another person)
 Any additional instructions that are necessary to ensure a timely settlement, such as delivery instructions or form of payment (e.g., fed funds)
For trades involving zero-coupon securities that mature in more than two years, accrued interest is not shown. However, the confirmation must specify that the interest rate is “0%,” and indicate that the customer will not receive periodic interest payments.

Question 55

Yield and Price Disclosures

Answer 55

If a trade is done on a yield basis, the computations will result in two prices. One represents the price if the bond is allowed to mature and the other represents the price if the bond is called on the first call date. The client will be given the lower of the two resulting prices.
For trades that are done at par, only the dollar price (100) is shown. These trades that are done at par are not subject to yield disclosure requirements.

Question 56

confirmation disclosure for bonds that are advanced refunded.

Answer 56

The following information relates to bonds that are advanced refunded:
 If the securities purchased are advance-refunded and the issue has only a sinking fund call, the proper disclosure on a customer confirmation is escrowed-to-maturity.
− If the sinking fund is operable, the securities must also be described as callable.
 If the securities purchased are advance-refunded and the issue has an explicitly reserved call feature, the proper disclosure on a customer confirmation is escrowed-to-call date. (The actual date will be listed.)
− If the securities are called, the proper disclosure is prerefunded and the date of the call and amount of the call price must be disclosed.

Question 57

confirmations

Providing Additional Information

Answer 57

If a confirmation indicates that additional information is available and the customer requests that information, the dealer must provide it within five business days if the trade in question occurred within the last 30 calendar days. For trades which occurred after this time period (i.e., the request is more than 30 calendar days following the transaction date), the information must be given or sent to the customer within 15 business days following receipt of the request.

Question 58

Information Regarding Agency Transactions

Answer 58

Client trades which are done as agency transactions should show all commissions or other remuneration being received by the firm that’s handling that transaction. Any concessions which are received by the firm must be shown as an aggregate dollar amount on the confirmation.

Question 59

Markups and Markdowns

Non-institutional customer

Answer 59

Dealers are required to disclose on a confirmation any markup or markdown when the dealer acts in a principal capacity with a non-institutional customer. The calculation should be based on the prevailing market price as defined under MSRB Rule G-30. This should be expressed as a total dollar amount and as a percentage of the prevailing market price.

Question 60

EMMA Disclosure

Answer 60

Rule G-15 also require dealers to disclose, in a format that’s specified by the MSRB, a reference and, if the confirmation is electronic, a hyperlink to a webpage on the MSRB’s Electronic Municipal Market Access (EMMA) website. This applies to both paper and electronic confirmations and should reference the type of information that the customer can obtain about the security (trade and price history, official statement)

Question 61

529 Plan Confirmations

Answer 61

According to MSRB rules, since a 529 plan (municipal fund security) is not considered a bond, only certain information is found on the confirmation. The confirmation includes the customer’s total purchase price (if the securities were purchased), the total sale price (if the securities were sold), as well as the name that’s used by the issuer to identify the securities from other municipal fund securities that it offers.

Question 62

Markup Markdown confirmation exception

Answer 62

Exceptions to the markup/markdown policy exist if the dealer has a functionally separate trading desk than the one that executes principal transactions with customers, a customer transaction in a list offering price transaction (new issue), and municipal fund securities.

Question 63

a DK or Don’t Know

Notification Requirements

Answer 63

If there’s an unrecognized trade (a DK or Don’t Know) and the trade cannot be confirmed, the party that receives the confirmation is required to promptly notify the confirming party by telephone and, within one business day, send a written notice, return receipt requested, indicating non-recognition of the transaction.

Question 64

Dealer not receiving a confirm from the contra firm

Answer 64

If a dealer has confirmed a trade but hasn’t received a confirmation or a DK notice from the contra-party, the confirming party must seek to determine whether a trade occurred. This must be done by no earlier than the fourth business day of the trade date and no later than the eighth business day following the trade.

Question 65

Settlement Dates

Answer 65

Regular way transactions settle two business days after the trade date, or T + 2. Cash transactions settle on the same business day as the trade.

Question 66

depository eligible delivery

Answer 66

If a municipal securities transaction is eligible for book-entry settlement at a securities depository that’s registered with the SEC (e.g., the Depository Trust Corporation, or DTC), the transaction must be settled by book entry through the facilities of a depository or through the interface between two depositories. The settlement procedures of the depository or depositories being used will apply.

Question 67

Non Depository eligible delivery

Answer 67

If the security involved is not depository-eligible, the transaction will be settled by physical delivery of the securities according to the following rules:
 Delivery of securities is expected on the settlement date at the offices of the purchasing dealer or its agent. Unless otherwise specified, good delivery of municipal bonds requires a legal opinion imprinted or attached. A municipal bond without a legal opinion is referred to as ex-legal and may be rejected by the buyer.
 If registered securities are delivered, a proper assignment must accompany the certificate. Any denomination from $1,000 to $100,000, in $1,000 increments, must be accepted.
 If bearer bonds are delivered, all unpaid coupons must be attached. Only $1,000 or $5,000 denominations are acceptable.
 If the bonds were called prior to the trade date, but the buyer was not notified of this fact, the bonds are not good delivery. If bonds are not called prior to the trade, but a call notice is published on or prior to the delivery date, the bonds are not good delivery unless the entire issue has been called.
 The purchasing dealer is not required to accept a partial delivery.

Question 68

Close-Out Procedure

Buy In

Answer 68

If the purchasing dealer buys bonds, but the seller fails to deliver them, the purchasing dealer may execute a buy-in by purchasing the bonds in the open market and billing the seller for any loss or expenses.

Question 69

Close-Out Procedure

Sell Out

Answer 69

If the selling dealer submits bonds to the purchaser that are in good deliverable form, but the purchaser refuses to pay, the seller may sell out the purchaser by selling the bonds in the open market and billing the purchaser for any loss or expenses. Neither type of close-out (buy-in or sell-out) may be executed unless specific notices have been given to the other party.

Question 70

Reciprocal Dealings with Municipal Securities Investment Companies (G-31)

Answer 70

MSRB rules prohibit members from soliciting business from an investment company as compensation for the firm executing sales of the investment company’s shares or units. The fact that a member is a leading seller of the fund’s shares shouldn’t entitle that member to special consideration in doing other business with the fund or the fund’s manager.

Question 71

Blotters

Answer 71

Records may not be maintained on a clearance date basis (the date that the securities are actually delivered or received). However, the date of clearance is noted in the blotters, account records, and securities records.
Blotters which show purchases and sales of municipal securities must be prepared by no later than the end of the business day following the trade date. Transactions involving the purchase and sale of securities should be posted to the account records by no later than settlement date and to the securities records by no later than the end of the business day following the settlement date.

Question 72

Method of Record Retention

Answer 72

To satisfy recordkeeping requirements, a firm may keep the original record or a reproduction. The records may be kept on microfilm, electronic or magnetic tape, or any other similar medium, as long as the broker-dealer has adequate facilities to store, retrieve, and reproduce the information for inspection purposes. Duplicate records must be stored separately from each other.

Question 73

Effect of Lapse in Dealer’s Registration

Record Retention

Answer 73

If a firm’s registration with the SEC lapses, the firm is still required to hold records for the period that’s specified unless a successor registrant chooses to keep and maintain the books and records.

Question 74

Customer Accounts Records

Answer 74

Customer account information required by MSRB rules must be obtained prior to the settlement of the initial transaction. The opening of a customer account must also be approved, in writing, by a municipal securities principal.

Question 75

The customer account records for a broker-dealer must reflect the following information.

Answer 75

 Customer’s name and residence or principal business address*
 Whether customer is of legal age
 Tax identification or Social Security number*
 Occupation
 Name and address of employer
 Information that will be used or considered when determining the suitability of recommendations and transactions*
 Signature of the Municipal Securities Representative who introduces the account to the firm and the signature of a Municipal Securities Principal indicating acceptance of the account*
 Whether the customer is employed by another broker-dealer or municipal securities dealer
 For discretionary accounts*
a. Customer’s written authorization to exercise discretionary power or authority with respect to the account
b. Written approval of the Municipal Securities Principal who supervises the account
c. Written approval of Municipal Securities Principal with respect to each transaction in the account indicating the time and date of approval on a daily basis
 Hypothecation agreements for margin accounts*
(Any items marked with an * are also required for institutional clients.)