Chp 5 MSRB (Self) Flashcards
The MOST important factor in determining the fair market value of a municipal security sold to a customer in a principal transaction is the: A yield B dealer cost basis C bond rating D maturity and call features
A.
Under Rule G-30, the MSRB states that the most important determinant of a fair price in a municipal principal transaction is the yield at which the security is priced. The yield should be comparable to securities of similar quality, maturity, coupon rate and block size available in the market at the time of the transaction. Also note that maturity, rating and call features are also items to be considered - but they are not the most important item. Dealer cost basis has no bearing on a fair price. Fair prices are based on yield (which is the same as market price) at the time of the transaction.
When selling municipal bonds to a customer from inventory, all of the following items are relevant in determining the mark-up EXCEPT:
A dealer’s best judgment of the market value of the bonds
B the fact that the firm is entitled to a profit
C expenses associated with executing the transaction
D dealer cost basis
D.
Dealer cost is irrelevant when determining a fair price - the yield (market value) of comparable securities in the market is the most important factor. Also considered are:
-Best judgment of the fair market value of the securities when the trade occurs, and if applicable, the value of securities exchanged or traded in connection with the transaction;
-Expense of filling the order;
-The fact that the firm is entitled to a profit;
-Availability of the security;
-Total dollar amount of the transaction (larger transactions for institutions should have a lower mark-up or commission per bond);
-Value of services rendered in effecting the trade;
-Maturity, rating and call features;
-Nature of the dealer’s business; and
-Existence of material information about the security from industry sources.
Which of the following would be considered to be manipulative and fraudulent practices in connection with the sale of a new municipal issue?
I A syndicate member fails to disclose any financial interest it has in an offering
II The offering is represented as a firm commitment underwriting, when, in fact, it is a best efforts-all or none
III The syndicate fails to disclose the additional takedown to customers purchasing the issue
IV The syndicate fails to provide customers purchasing the issue with a copy of the Official Notice of Sale
A I only
B I and II
C III and IV
D I, II, III, IV
B.
Failure to disclose a syndicate member’s financial interest in an issuer being underwritten would be fraudulent (this could only occur in corporate offerings). Misrepresenting an underwriting as a “firm commitment,” when in fact it is a “best efforts - all or none” also is fraudulent. There is no requirement to disclose spread components to customers (e.g., additional takedown) in a negotiated offering. Only the gross spread must be disclosed. The Official Notice of Sale is the advertisement placed in the Daily Bond Buyer soliciting bids from underwriters for a competitively bid new bond issue. It has nothing to do with customers.
A quotation that must be confirmed prior to executing an order is a: A bona-fide quote B subject quote C nominal quote D representative quote
B.
A subject quote is one which has to be verified with the quoting dealer before an order to buy or sell at that size and/or price can be entered.
After the end of the underwriting period, a syndicate member must send a copy of the final Official Statement to any customer, or potential customer, who so requests, within: A 1 business day of request B 2 business days of request C 3 business days of request D 5 business days of request
A.
Under SEC Rule 15c2-12, a customer or potential customer requesting a copy of the Official Statement after the end of the underwriting period, must be sent a copy within 1 business day of request.
Under MSRB rules, municipal securities traders that participate in secondary market joint accounts:
A can only act as agent in the transactions and cannot carry positions overnight
B cannot disseminate quotes severally for the securities held by the account; any quote can only indicate that one market exists for the securities
C cannot place orders to buy bonds for an accumulation account sponsored by a dealer participating in the joint account
D cannot effect customer transactions and can only deal with other municipal broker-dealers
B.
Municipal secondary market joint accounts are formed by municipal firms to purchase or sell large blocks of bonds. Any quotes disseminated on those bonds must appear as one quote; it cannot appear that there are multiple markets for the bonds when in fact there is only one (the joint account).
Under MSRB Rule G-15, confirmations of which of the following transactions MUST show the yield? I Trades effected at par II Transactions in variable rate bonds III Non-callable bonds traded at a discount IV Callable bonds traded at a premium A I and II B III and IV C I, II, III D I, III, IV
B.
All customer confirmations must show the yield (lower of yield to maturity or yield to call) with 2 major exceptions - bonds sold at par; and variable rate bonds.
When a bond is purchased at par, the nominal (stated) yield and the yield to maturity are the same. If a bond purchased at par is called early at par, the yield remains the same; if it is called at a premium, the yield will improve above the stated rate. In essence, the stated rate of interest is the minimum that can be earned on the bond, so this is the only disclosure required. The second exception is for variable rate notes. For these securities, there is no yield disclosure because the interest rate is reset to a market rate every 6 months - it is the market that determines the yield. Unless one is a fortune teller, it is impossible to know what the future yield would be. For all other bond trades, whether non-callable or not, the yield changes as the price moves below or above par - hence the yield must be disclosed.
A negotiated offering has a gross spread of $18 per bond, comprised of the following: Concession: $7.00 Additional Takedown: $4.00 Underwriting Fee: $3.00 Manager Fee: $4.00
Which of the following amounts must be disclosed as underwriter compensation to customers who purchase the issue?
A $0.00
B $4.00
C $14.00
D $18.00
D.
There is no requirement to disclose the components of the spread to customers in a negotiated underwriting. Only the total spread amount is required to be shown, either as an aggregate amount; or on a per bond basis. In this example, the spread is broken down into 4 components; the management fee; underwriting fee; additional takedown; and concession. The 4 of these total $18.00 per bond.
A municipal finance professional makes a $250 contribution to an issuer official in a primary election. Two months later, he makes another $250 contribution to the same issuer official in the general election. Which statement is TRUE?
A The municipal finance professional has violated Rule G-37
B The employing municipal firm has violated Rule G-37
C Both the municipal finance professional and the employing municipal firm have violated Rule G-37
D Neither the municipal finance professional nor the employing municipal firm have violated Rule G-37
D.
As long as a municipal finance professional is eligible to vote for an issuer official, Rule G-37 permits a “de minimis” exemption of $250 per election per official. As there are 2 elections, the total of $500 does not trigger a prohibition on municipal securities business with that issuer.
Which of the following information should be noted on an agency trade order ticket under MSRB rules?
I Date and time of receipt of the order
II Date of execution, and to the extent feasible, time of execution
III Price of execution
IV If canceled, date and terms of cancellation, and to the extent feasible, time of cancellation
A I only
B I, III, IV
C II, III, IV
D I, II, III, IV
D.
For agency orders, the following information is included on the order ticket:
-Terms and conditions of the order.
-Date and time of the receipt of the order.
-The price at which the trade was executed.
-The date of execution, and to the extent feasible, the time of execution.
-If the account is that of a partnership, corporation, a joint account, or an order entered pursuant to a power of attorney, the name and address (if other than the account address) of the person entering the order.
-If the order is canceled by a customer, the record must show the terms, conditions and date of cancellation, and to the extent feasible, the time of cancellation.
-If the trade is discretionary, the ticket must be designated as such.
If a transaction in a callable municipal bond is effected on a yield basis, the dollar price is calculated to the:
A near-term in-whole call at par
B near-term in-whole premium call
C lower of price to maturity or price to call
D maturity date
C.
Be careful with this question. We don’t know if the bond is a discount or a premium, thus the standard rule that the bond must be priced to the lower of price to maturity or call applies.
If the question stated that this was a “premium” bond, then the answer would be Choice B. If the question stated that this was a discount bond, then the answer would be Choice D. Since the question doesn’t say, Choice C is best.
Under MSRB Rule G-26, the carrying party must transfer customer positions to the receiving party: A promptly after validation B within 1 business day of validation C within 2 business days of validation D within 3 business days of validation
D.
When a broker-dealer receives account transfer instructions, it has 1 business day to validate the positions, and another 3 business days to complete the transfer under MSRB rules.
A municipal dealer is obligated to provide the customer with an Investor Brochure:
A at, or prior to, the opening of the account
B annually
C whenever a new issue is purchased in the account
D every 3 years
B.
Each municipal broker-dealer must send in writing to each customer annually:
- a statement that it is registered with the SEC and MSRB;
- the website address for the MSRB; and
- a statement as to the availability of an investor brochure that describes the protections provided by MSRB rules and how to file a complaint with the appropriate SRO (which is FINRA, since the MSRB cannot enforce its own rules).
Every municipal securities dealer must have at least 2 registered municipal principals EXCEPT: I Bank dealers II FINRA members III Dealers with fewer than 11 associated persons A I only B II only C I and III D II and III
D.
As a general rule, municipal securities firms are required to have 2 municipal securities principals. However, two exceptions are provided:
-If a municipal securities dealer has fewer than 11 full time employees engaged in the municipal securities business (translated, this means full-time associated persons), it is only required to have one municipal securities principal. Please note that clerical employees are not included in the “fewer than 11” number.
-If the firm is also a FINRA member with a person licensed as a General Principal (Series 24), then only 1 Series 53 license is required.
The new account form for a cash account must evidence which of the following signatures? I Customer II Associated Person III Municipal Principal A I and III B II and III C II only D I, II, III
B.
There is no requirement that a customer’s signature be obtained to open an account (unless the account is a margin account, where a margin agreement must be signed, or a discretionary account, where the customer must sign a power of attorney).
The only signatures on the new account form that are required are those of the associated person who took the information, and the municipal principal who approves the opening of the account.
The MSRB is empowered to do which of the following?
I Assess fines for rule violations
II Formulate rules for the municipal marketplace
III Interpret rules for the municipal marketplace
IV Suspend firms for rule violations
A I and II only
B II and III only
C III and IV only
D I, II, III, IV
B.
The MSRB is empowered to write rules for municipal market participants; and issues letter interpretations that “flesh-out” those rules to cover specific circumstances. However, the MSRB does not have the power to enforce its own rules - it cannot examine its registrants, nor can it impose sanctions against its registrants.
Enforcement is performed by the existing regulators - FINRA for municipal broker-dealers; and by the bank regulators (FRB; FDIC; Office of Comptroller of Currency) for bank municipal bond departments.
