MSRB Rules Flashcards
Under the Securities Acts of 1975, the Municipal Securities Rulemaking Board was created and empowered to regulate the:
I disclosure of new information by municipal issuers
II recordkeeping and settlement procedures of municipal broker-dealers
III profit levels achieved by municipal broker-dealers
A. I only
B. II only
C. II and III
D. I, II, III
The best answer is B.
The MSRB is empowered to regulate municipal market participants - municipal brokers, dealers, and banks that deal in municipal bonds. The MSRB has no power to regulate municipal issuers, making Choice I false. The MSRB does not regulate profit levels, making Choice III false.
The Securities Acts Amendments of 1975 which established the Municipal Securities Rulemaking Board allow the MSRB to do all of the following EXCEPT create regulations:
A. covering municipal related recordkeeping
B. covering delivery of disclosure documents on new issues (Official Statements)
C. setting maximum mark-ups and commissions
D. regarding permitted gifts to persons where the gift is related to the municipal securities business
The best answer is C.
The MSRB is empowered to create regulations for participants in the municipals market, but has no enforcement power. Enforcement is performed by the banking and securities regulators. The MSRB has set rules related to municipal recordkeeping and disclosure. It also sets rules for the conduct of municipal securities representatives - including imposing a $100 gift limit similar to that of FINRA. There are no rules setting maximum mark-ups, since this would be anti-competitive; but there are rules for determining “fair” mark-ups and commissions.
The MSRB regulates all of the following EXCEPT:
A. municipal brokers
B. municipal issuers
C. municipal dealers
D. municipal bank dealers
The best answer is B.
The MSRB has no authority over municipal issuers. It regulates municipal brokers and dealers, including bank dealers in the municipal market.
Enforcement of regulations regarding trading of municipal securities, as they apply to firms that are members of FINRA, is performed by (the):
A. NYSE
B. FINRA
C. MSRB
D. FDIC
The best answer is B.
The MSRB has no enforcement capability - it creates rules, leaving enforcement to the existing regulatory bodies. Since municipal bond trades are effected “over-the-counter,” again, FINRA acts as the enforcement agent for broker-dealers. The NYSE itself only regulates its own trading floor.
Enforcement of MSRB rules for bank dealers is performed by all of the following EXCEPT the:
A. Office of Comptroller of Currency
B. Municipal Securities Rulemaking Board
C. Federal Reserve Board
D. Federal Deposit Insurance Corporation
The best answer is B.
Enforcement of MSRB rules for bank dealers that are not registered as broker-dealers with FINRA is performed by the bank regulatory bodies - the Office of Comptroller of Currency; the Federal Reserve; and the Federal Deposit Insurance Corporation. Note that the MSRB writes rules for municipal market participants; but cannot enforce its own rules. It relies on the existing enforcement network for this.
Under MSRB rules, a registered representative is prohibited from sharing in the gains and losses of a customer’s account unless the:
A. registered representative has made a written guarantee of performance to the customer
B. registered representative agrees to reduce the commission rate to be charged
C. customer agrees to the arrangement in writing
D. registered representative contributes capital proportionate to his sharing percentage and receives written approval of the principal
The best answer is D.
Sharing in a customer account is prohibited unless the registered representative opens a joint account with the customer; shares in gain and loss in proportion to the capital contributed; and gets written approval for the account from the principal.
Under MSRB rules, a registered representative can perform all of the following functions EXCEPT:
A. offering new municipal issues to retail customers
B. approving municipal advertising that will be sent to customers
C. trading municipal issues in the secondary market
D. offering call and put options on municipal securities to customers
The best answer is B.
Registered representatives are not permitted to approve municipal advertising. To do so, the individual must pass the principal’s exam. Municipal representatives are permitted to sell new municipal issues to customers; trade municipal issues in the secondary market; and offer call and put options on municipal issues (though this is rarely done because such contracts are customized and are not exchange traded).
Under MSRB rules, which of the following gifts given by a registered representative would be considered excessive?
A. $50 baseball mitt
B. $75 desk set
C. $100 cash
D. $125 bottle of perfume
The best answer is D.
The MSRB limits gifts related to one’s activities as a registered representative to $100 value per person per year.
A municipal securities firm is hosting an event in its suite at a football game in the city where the firm is headquartered. A registered representative wants to invite an individual to join him in the suite to watch the game. The individual works for the municipality, and has worked with the registered representative on previous bond underwriting deals for the municipality. The ticket to the game is worth $250. Which statement is TRUE about this?
A. Giving the ticket to the game to this individual violates the MSRB $100 gift limit
B. This individual can be given the ticket because it has a de minimis value under the MSRB Political Contribution rule
C. This individual can be given the ticket because the firm is hosting the event and it is acceptable to invite a business client
D. This individual cannot be given the ticket because it is a conflict of interest
The best answer is C.
This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario!
The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official’s campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution.
The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm’s policies and procedures - which is the case here because the firm is hosting the event.
A registered representative works in the municipal finance department of a municipal securities firm in a large city and is defined as a Municipal Finance Professional (MFP). The firm recently completed a $100 million underwriting for the city and the firm is hosting a dinner to celebrate the closing of the deal. The event is expected to cost $300 per person, including the cost of a cocktail reception, dinner, and the cost transporting the group to and from the venue where the event is being held. The representative wishes to invite one of the town officials with whom he worked on the underwriting to the event. Which statement is TRUE about doing this?
A. Taking this individual to dinner violates the MSRB $100 gift limit
B. Taking this individual to dinner is a violation because the $300 value exceeds the MSRB Political Contribution rule limit
C. Taking this individual to dinner is permitted because this is business entertainment
D. This individual cannot be taken to dinner because it is a conflict of interest
The best answer is C.
This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario!
The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official’s campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution - rather, it is taking a client to dinner.
The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm’s policies and procedures.
A registered representative has a wealthy client who has placed $1 million under management with the representative. The client has recently been elected to his town’s Board of Estimate and Taxation, and the municipal securities firm that employs the representative has done underwritings in the past for the town. The representative wishes to take the client out to dinner, which is expected to cost $250. Which statement is TRUE about doing this?
A. Taking this individual to dinner violates the MSRB $100 gift limit
B. Taking this individual to dinner is permitted because it has a de minimis value under the MSRB Political Contribution rule
C. Taking this individual to dinner is permitted because this is business entertainment
D. This individual cannot be taken to dinner because it is a conflict of interest
The best answer is C.
This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario!
The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official’s campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution - rather, it is taking a client to dinner.
The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm’s policies and procedures.
Under MSRB rules, a principal must review and approve:
I each municipal transaction
II each piece of customer correspondence relating to municipal transactions
III the handling of each customer complaint
A. I only
B. I and II
C. II and III
D. I, II, III
The best answer is D.
Under MSRB rules, the principal must approve each new account; approve each municipal trade (this need not occur prior to the trade); handle the resolution of each customer complaint; and approve each mailing piece used to solicit business.
Under MSRB rules, inquiry should be made about which of the following in order to make suitable recommendations to customers?
I Investment objective
II Tax bracket
III Financial situation
IV State of residence
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is D.
All of the choices are relevant when recommending municipal bonds - investment objective; tax bracket; financial situation; and state of residence (since municipal bonds purchased by state residents are exempt from taxation in that state; but are not exempt from taxation when purchased by non-residents).
A municipal dealer is reoffering 7% bonds which he bought at par. Which of the following quotes would be considered “fair and reasonable”?
I 108
II 6.00
III 6.90
IV 100 1/2
A. I and II
B. III and IV
C. I and III
D. II and IV
The best answer is B.
The MSRB does not impose a fixed percentage mark-up that it considers to be “fair and reasonable.” The dealer is supposed to use his judgment about the size of the trade; dollar amount involved; the difficulty of the trade; etc., to determine a fair and reasonable mark-up.
In this example, the bond has a 7% coupon rate and was purchased by the dealer at par.
If the bond is reoffered at 100 1/2, the dealer is taking a 1/2% mark-up.
If the bond is reoffered at 108, the dealer is taking an 8% mark-up.
If the bond is reoffered at 6.90%, the dealer is reducing the yield by .10 from the stated 7.00 yield. .10/7.00 = 1.4% reduction in yield, which approximates the percentage mark- up.
If the bond is reoffered at 6.00%, the dealer is reducing the yield by 1.00 from the stated 7.00 yield. 1/7.00 = 14% reduction in yield, which approximates the percentage mark-up.
Of the quotes given, it appears that 100 1/2 and 6.90 are reasonable; 108 and 6.00 appear to be most unreasonable.
Under MSRB rules, confirmation disclosure for bonds sold at par must include which of the following?
I Whether the securities are callable
II Capacity in which the broker-dealer acted
III Total dollar amount of the transaction
IV The yield at which the transaction was effected and the resulting dollar price
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is C.
For municipal bonds that are traded at par, there is no requirement to show the yield at which the transaction was effected, because it will not differ from the stated rate of interest since the bonds were traded at par. All of the other items must be disclosed; whether the securities are callable, with disclosure of “in-whole” call dates; the capacity in which the broker-dealer acted (either as “agent” or “principal”); and the total dollar amount of the transaction.
Under MSRB rules, confirmation disclosure for bonds sold at par must include all of the following EXCEPT:
A. whether the securities are callable
B. capacity in which the broker-dealer acted
C. total dollar amount of the transaction
D. the yield at which the transaction was effected and the resulting dollar price
The best answer is D.
For municipal bonds that are traded at par, there is no requirement to show the yield at which the transaction was effected, because it will not differ from the stated rate of interest since the bonds were traded at par. All of the other items must be disclosed; whether the securities are callable, with disclosure of “in-whole” call dates; the capacity in which the broker-dealer acted (either as “agent” or “principal”); and the total dollar amount of the transaction.
Which of the following constitutes a municipal control relationship that must be disclosed to customers?
A. The President of the municipal broker/dealer is the Treasurer of the municipality whose bonds are being recommended
B. The municipal broker-dealer has its headquarters in the municipality whose bonds are being recommended
C. The municipal broker-dealer has won every competitive bid for the municipality’s securities over the past 3 years
D. The municipal broker-dealer always makes a market in the municipality’s securities that are being recommended
The best answer is A.
A control relationship exists when someone at a municipal firm is in a position of influence over the issuer of the securities. Choice A is clearly a control relationship - the President of the broker-dealer is also the Treasurer of the town whose securities are being recommended. Such relationships must be disclosed to customers. The other choices are not examples of control relationships, since there is no ability to influence the issuer in those situations.
The Chairman of a bank municipal broker-dealer is on the town council involved in a negotiated municipal bond underwriting being performed by that municipal broker-dealer. Under MSRB rules, which statement is TRUE regarding disclosure of the relationship?
A. The relationship need not be disclosed to any purchaser of the bonds
B. The relationship must be disclosed to customers in writing no later than at confirmation of sale
C. The relationship must be disclosed only if the municipality agrees in writing to such disclosure
D. The relationship must be disclosed only if the broker-dealer is the sole underwriter on the issue
The best answer is B.
The Chairman of the municipal broker-dealer is considered to be a “control person,” since he is on the town council and the town has selected his firm to perform a negotiated bond underwriting. Control relationships must be disclosed in writing to customers who buy those bonds either at, or prior to, confirmation of sale.
Under MSRB rules, a registered representative that has been given discretionary authority by a customer, needs specific customer authorization to purchase:
A. non-investment grade municipal bonds
B. bonds where a control relationship exists between the municipal broker-dealer and the issuer whose bonds are purchased
C. municipal bond unit investment trusts
D. municipal bond option contracts
The best answer is B.
Discretionary authority given by a customer allows the registered representative to buy or sell any securities that the representative considers to be suitable for that customer. It makes no difference if the securities selected are not investment grade; nor if the securities are “packaged products” like mutual funds and unit trusts; or “derivatives” like options.
However, the MSRB does require that if a control relationship exists between a broker-dealer and the issuer whose bonds are to be purchased, this can only be done in a discretionary account with specific customer authorization. For example, if the Mayor of a municipality is an Officer of the municipal broker-dealer, a control relationship exists. To buy the municipality’s bonds into discretionary accounts, specific customer authorization is required.
Under MSRB rules, which of the following are allowed?
I Guaranteeing a customer account against loss
II Recommending the purchase of a put option to the customer as protection against loss
III Agreeing to repurchase bonds from a customer personally at a preset price
IV Recommending the use of a repurchase agreement to the customer as a means of protecting against loss
A. I and III
B. II and IV
C. I, II, III
D. None of the above
The best answer is B.
Recommending the use of put options or repurchase agreements to protect against loss are both valid strategies and are permitted under MSRB rules. However, it is prohibited to guarantee a customer’s account against loss and to share in the gain or loss of a customer’s account (unless specific tests regarding principal approval and sharing in proportion to capital contributed are met).
Which of the following statements are TRUE regarding the requirements of the MSRB for handling written customer complaints?
I All customer complaints must be resolved
II If the customer alleges in a complaint that there has been a monetary loss, the MSRB must be notified
III The municipal principal must handle the resolution of each written customer complaint
IV The municipal principal must retain a file of all customer complaints with their resolution
A. I and III
B. II and IV
C. I, III, and IV
D. I, II, III, IV
The best answer is C.
Written customer complaints should be resolved. The MSRB requires that such complaints be handled under the supervision and review of the municipal securities principal; and that records of complaints with their resolution (if any) be retained for 6 years (FINRA only requires a 4 year retention period for complaint records). There is no requirement to notify the MSRB about the complaint. If the MSRB received a copy, they couldn’t do anything anyway, since they don’t enforce their rules. They would simply hand the complaint to FINRA, who enforces MSRB rules for broker-dealers.
A municipal bond dealer typically engages in which of the following activities?
I Distributing bona-fide quotes to interested parties
II Participating in syndicates bidding on new issues
III Acting as a market maker by taking long positions
IV Acting as a market maker by taking short positions
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is C.
Municipal dealers participate in bidding for new issues, distribute quotes, and take inventory positions (long positions) in municipal issues. Short positions are not taken due to the thin trading market for municipals, which makes short covering difficult.
A municipal firm that is participating in a secondary market joint account can do all of the following EXCEPT?
A. effect a transaction for an accumulation account from the joint account
B. effect a transaction for a customer account from the joint account
C. disseminate a quote separately for the securities held by the account
D. effect a transaction for a related portfolio from the joint account
The best answer is C.
If a municipal firm is participating in a “joint account” to sell a block of bonds, only one quote is permitted for the account as a whole - there cannot be separate quotes. Thus, it cannot appear that there are multiple markets for this security when there really is only one - the secondary market joint account. Selling responsibility and liability are shared among account members in a similar fashion to an underwriting agreement. Any transaction can be effected out of the account - selling to an individual, another firm, a related portfolio, or an accumulation account.