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Series 7 Exam > MSRB Addendum: Chapter 12 > Flashcards

MSRB Addendum: Chapter 12 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

MSRB Basics

A
  • Creates rules for municipal firms and broker/dealers involved in municipal activities.
  • Made up of 21 individuals
  • No ability to enforce; SEC and FINRA enforce. Note - FINRA is the enforcement authority over NYSE b/c munis trade OTC.
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2
Q

Firm employees who must be registered per MSRB

A
  • Must be registered and take either series 7 or series 52 if having any responsibility in the firm, other than clerical or ministerial
  • This includes credit analyst working with the separately identifiable division, or department of the bank.

– includes training personnel, those handling orders, money, securities, or anyone analyzing or making recommendations.

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3
Q

MSRB disclosure rules: muni issue

A

Disclosure is required for:

  1. Control persons of a brokerage working, or associated with, the municipality
  2. Control persons of the municipality, working, or associated with, the brokerage.
  3. Conflicts of interest:
    Ex: advisor, serving as an underwriter and a negotiated underwriting.
    Ex: firm recommending municipal bonds to a discretionary account that they have in inventory
    Ex: underwriters submitting orders which may benefit the retail operations of the firm
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4
Q

Test requirements to engage in muni activity

A
  • Broker dealer must have at least one municipal principal, with a series 53.
  • If broker dealer business is limited to only municipal bonds such as 529 plans, a series 51 limited municipal principal will suffice.
  • Full-service municipal firm must have at least one series 53 municipal partner.
  • Representative who sells only exempt securities (munis and treasuries) may qualify with series 52 municipal registered representative. Then, may only sell management companies(I.e. mutual finds), or UITs, which hold principles or treasury securities.
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5
Q

MSRB continuing education

A
  • Same as FINRA - needs regulatory element and firm element.
  • Firm element must be relevant to representatives’ activities. Thus, continuing education should be related to municipal activity.
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6
Q

MSRB statutory disqualification/discipline

A
  • Same as FINRA for statuary disqualification:
    1) Convicted felon in last 10 years
    2) Convicted of Security – or theft-related misdemeanor in last 10 years
    3) Lying on U4
    4) Barred by SRO

Discipline:
- Firm must inform SRO if rep is disciplined with fine exceeding $2500
- Firm must report arbitration case or other discipline exceeding $15,000 to appropriate SRO.
-MSRB codes of procedure and arbitration follow FINRA rules.

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7
Q

MSRB record keeping rules

A
  • More stringent than FINRA
  • SPAM (stock certificates, partnership papers, articles of incorporation, and meeting minutes) must be kept permanently, just like FINRA
  • List of records that must be kept for six years is same as FINRA, plus customer complaints, and syndicate records where the broker-dealer was the managing or comanaging underwriter
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8
Q

MSRB customer account info requirements

A

Customer account information required by the MSRB includes the minimum information required by FINRA plus several additional items:
1) investor’s tax status,
2) investment objective,
3) financial condition.

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9
Q

MSRB and complaints about representatives

A

When a written customer complaint is received, the firm is required to send out the investor brochure.

The purpose for the investor brochure is to give the customer a detailed description of their rights or the actions they can take against the firm or its associated persons.

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10
Q

MSRB and potential conflicts of interests in new issues

A

When issuing new municipal bonds, the issuing municipality often employs a financial adviser, who may also be eligible to be the underwriter on the offering.

Potential for conflicts of interest here, so the broker/dealer acting in a financial advisory relationship with the issuer must disclose the relationship.

1) If the issue is a competitive bid, the financial adviser must get the issuer’s permission to bid on the offering.
2) In a negotiated underwriting, the adviser must terminate the financial advisory relationship, as well as disclose any conflicts of interest and any remuneration, or underwriting spread, which they’ve received.

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11
Q

MSRB uniform practices

A

MSRB rules regarding uniform practices are consistent with FINRA rules, but include additional rules addressing the unique features of municipal bonds.

Note: These additional rules are beyond the scope of the series 7 exam.

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12
Q

Munis and firm quotes

A

Firm quote: actual price municipal dealer is willing to buy or sell the security

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13
Q

Munis: Firm acting as dealer

A
  • A markup from the offering price is charged
  • Firm selling to a customer: mark down from the bid price
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14
Q

Munis: Firm acting as an agent

A

A commission is charged

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15
Q

Munis: Subject quote

A
  • a.k.a. Nominal quote
  • More information is needed.
  • Are informational quotes only; non-binding; cannot be represented as firm quotes
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16
Q

Munis: “Out firm for an hour with 5-minute recall”

A

– The dealer who is the recipient of this quote has a firm quote, which is good for an hour, so they can attempt to sell the bonds before they must buy them.

– However, the dealer who owns the bonds and gave the quote may accelerate the deadline to five minutes at any time throughout the hour, and quote recipient dealer has only five remaining minutes to accept the firm quote.

17
Q

Munis: Workable indication

A
  • A likely quote
  • A non-binding quote to determine the buyers interest level
18
Q

Quoting bond yields: yield to worst

A
  • Must quote lower yield between yield to maturity and yield to call.
  • Premium bond: lower = YTC
  • Discount bond: lower = YTM
  • Partial bond call: bonds to be repurchased (called) are selected at random.
19
Q

Short-term obligation rate transparency system (SHORT System)

A

MSRB rules require municipal bond dealers to report secondary market trades through the SHORT system

20
Q

MSRB broker-dealer disclosure on trade confirmations

A
  • MSRB requires same broker/dealer disclosure as FINRA, plus the B-D’s phone number.
21
Q

MSRB requirements for broker-dealer customer pricing

A
  • Broker-dealer is required to get a “fair and reasonable” price, not the best price.
  • Do not have to abide by FINRA 5% guideline
22
Q

Muni bond good certificate delivery

A
  • Proper denomination
  • Be legible
  • Name of issuer, coupon, rate, and maturity date must be legible
  • Contain the legal opinion
  • Have all future interest coupons
  • If registered, be endorsed by registered owner

Penalties for mutilated certificates or missing info:
- If next coupon is missing, must attach a check for that payment

23
Q

MSRB: Customer suitability requirements

A
  • Much like FINRA suitability determination rules, such as must meet customer’s 1) investment objective, 2) risk tolerance and 3) investment budget
  • Additional: Determine customer’s tax bracket. If unable to determine exact tax bracket, must determine at a minimum if the customer is in a high bracket…

…because munis are most suitable to high income individuals seeking tax relief

24
Q

MSRB: Gift and gratuity rules

A
  • Mirrors FINRA
  • Less than $100/year
  • Does not count consumption (dinner, drinks) or taking client to sports event
  • Gifting two $65 tickets and not attending = not cool.
25
Q

MSRB rules: advertising

A
  • A any written communication except 1) the official statement, 2) preliminary official statement, and 3) listing of dealer’s inventory is considered advertising
  • MSRB does not recognize sales literature, thus all other written communication is considered advertising. Include testimonials by municipal advisors.
26
Q

MSRB and ACATS

A
  • ACATS - “automated customer account transfer service”
  • When ACATS form is received, broker-dealer has:
    • Three (3) days to validate account securities positions
    • Four (4) days to complete asset transfer to new broker-dealer.
27
Q

MSRB rules for supervising municipal account activity

A
  • Account activity must be supervised by municipal securities principal series 53
  • Limited municipal securities principal series 51 required for me as well. Fund securities such as 529 plans
  • At the branch level, munis can be supervised according to the sales function buy a series 9/10 branch officer, or BOM.

-BOM can handle customer complaints and account activity

-BOM cannot approve advertising

-For bank dealers, muni account activity and documentation must be supervised by a bank officer.

-Bank dealers do not require a financial and operations principal Series 27
28
Q

Municipal Finance Professionals and their own accounts

A
  • If they open an account at another broker dealer, they must get their employer dealer’s permission.
  • Duplicate confirmations/statements must be sent to the employer broker dealer once the account is opened.

-Similar to NYSE rules.

29
Q

Munis: Official statement

A
  • disclosure statement for new issues of munis. Equivalent of the prospectus.
  • Usually prepared by issuer with assistance from the underwriter.

– underwriters/municipal firms may not sell the offering without the ability to deliver the official statement with the final confirmation to the customer.

  • Not required if:
    1) aggregate principal price is less than $1 million, or
    2) if muni reaches maturity in nine months or less
    3) muni has par of $100,000 and is sold to 35 or fewer sophisticated investors
  • Must disclose any control relationship between B-D and issuer on all trades (primary offering and secondary/OTC)
30
Q

CUSIP number

A
  • CUSIP = committee on uniform securities identification procedures
  • Number is acquired by winning underwriter of a competitive offering.
  • Number is simply issued upon signing agreement in a negotiated offering.
31
Q

Altering the CUSIP number

A
  • Ex: a put feature attached to a portion of outstanding bonds requires changing the CUSIP number for that group of bonds
  • is responsibility of broker dealer
32
Q

MSRB and political contributions

A
  • Political contributions must be reported quarterly at end of calendar quarter.
  • Can only contribute to candidates the rep can vote for.

-Can donate $250 in primary, then another $250 in general election

-Must report contributions to employing B-D, which reports to SRO quarterly

  • Municipal security B-D may not contribute to campaigns of any candidate with influence over the municipality.

Penalties:
- inability to engage in negotiated underwriting for two years for both the rep and the B-D.
- If rep moves to a new B-D, the two-year waiting period follows him and affects to new B-D, too. Old firm remains suspended up to two years even after he/she left

33
Q

MSRB and soliciting bond sales

A
  • Municipal broker-dealers may solicit interest in bonds it does not own as long as it is willing to obtain the bonds if asked and is not aware that they are no longer available.
  • When info is needed, B-D may enter a bid wanted or offer wanted, or request a workable indication.
34
Q

MSRB rules for phone solicitation

A
  • Calls only between 8AM-9PM in recipient’s time zone

-Maintain and honor do not call list

  • Must update in-house do not call list from national list every 31 days.

-One exception to do not call list: rep may call to verify account info only.

35
Q

Appointed responsibility for MSRB electronic communications

A
  • Each municipal broker dealer or municipal bank dealer must appointment individual responsible for electronic communication with the MSRB
  • Must be Series 53 or Seris 51 limited principal
  • Communications that are required to be sent to the MSRB must be sent within 17 days after the end of each calendar quarter
36
Q

MSRB and anti-laundering

A
  • Same rules, outlined in PATRIOT Act and Bank Secrecy Act
  • Must have procedures to identify customers and to detect fraud/red flags.
  • Must include a training program for firm employees and an independent audit to test the procedures

Series 7 Exam (14 decks)

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