MSRB Rules Flashcards
Under the Securities Acts of 1975, the Municipal Securities Rulemaking Board was created and empowered to regulate all of the following EXCEPT:
A. disclosure of new information by municipal issuers
B. recordkeeping and settlement procedures of municipal broker-dealers
C. disclosure of information on confirmations to customers
D. suitability requirements for making recommendations of municipal securities
The best answer is A.
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, thus the MSRB cannot set disclosure requirements for municipal new issues. It does set settlement procedures, recordkeeping rules, and confirmation disclosure rules for municipal transactions. It also sets rules for the conduct of customer accounts, including the items that should be considered when determining the suitability of recommendations to customers.
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 does NOT regulate which of the following?
A. Municipal sales persons
B. Municipal brokers
C. Municipal Bond Mutual Fund distributors
D. Municipal traders
The best answer is C.
The MSRB has no authority over municipal issuers. It regulates municipal brokers and dealers, including bank dealers in the municipal market as well as employees of these entities. Anyone involved with municipal bond mutual funds (as opposed to individual issues) would be regulated by FINRA.
The MSRB regulates all of the following EXCEPT:
A. municipal salespersons
B. municipal issuers
C. municipal underwriters
D. municipal traders
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 as well as employees of these entities.
Which statement is TRUE regarding the enforcement of MSRB rules for broker-dealers?
A. Enforcement of MSRB rules for registered broker-dealers is performed by the MSRB
B. Enforcement of MSRB rules for registered broker-dealers is performed by FINRA
C. Enforcement of MSRB rules for registered broker-dealers is performed by the FDIC
D. Enforcement of MSRB rules for registered broker-dealers is performed by the FRB
The best answer is B.
The enforcement agencies for the MSRB are: Office of the Comptroller of Currency, Federal Deposit Insurance Corporation, and the Federal Reserve Board for bank dealers that are not registered with FINRA and the SEC and thus are only subject to inspection by the bank regulators; and the SEC and FINRA for registered broker-dealers.
All of the following enforce MSRB rules for bank dealers EXCEPT:
A. Office of the Comptroller of Currency
B. Federal Deposit Insurance Corporation
C. Federal Reserve Board
D. Office of Thrift Supervision
The best answer is D.
The enforcement agencies for the MSRB are: Office of the Comptroller of Currency, Federal Deposit Insurance Corporation, and the Federal Reserve Board for bank dealers that are not registered with FINRA and the SEC and thus are only subject to inspection by the bank regulators; and the SEC and FINRA for registered broker-dealers.
The OTS - Office of Thrift Supervision, supervised Savings and Loans - and savings and loans do not deal in the municipal marketplace. It was created to deal with a savings and loans crisis that erupted in the 1980’s and since has been folded into the Office of Comptroller of Currency.
Under MSRB rules, which statement is FALSE about a registered representative sharing in a customer account?
A. Sharing in a customer account is prohibited unless the registered representative receives approval to do so from the principal
B. Sharing in a customer account is prohibited unless the registered representative shares only in proportion to the capital contributed
C. Sharing in a customer account is prohibited unless the registered representative shares in both gain and loss
D. Sharing in a customer account is prohibited unless the MSRB is notified in advance of the sharing arrangement
The best answer is D.
Sharing in a customer account is prohibited unless the registered representative gets written approval for the account from the principal; opens a joint account with the customer; and shares in gain and loss in proportion to the capital contributed. There is no requirement to give notice of such an arrangement to the MSRB - if this were the case, the MSRB couldn’t do anything about it anyway since they do not enforce their rules (enforcement for broker-dealers is performed by FINRA).
Under MSRB rules, all of the following statements are true about a registered representative sharing in a customer account EXCEPT the:
A. registered representative must receive approval to do so from the principal
B. registered representative must share only in proportion to the capital contributed
C. registered representative must share in both gain and loss
D. MSRB must be notified in advance of the sharing arrangement
The best answer is D.
Sharing in a customer account is prohibited unless the registered representative gets written approval for the account from the principal; opens a joint account with the customer; and shares in gain and loss in proportion to the capital contributed. There is no requirement to give notice of such an arrangement to the MSRB - if this were the case, the MSRB couldn’t do anything about it anyway since they do not enforce their rules (enforcement for broker-dealers is performed by FINRA).
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).
A municipal securities representative wishes to give pen and pencil sets valued at $75 to each of his top 20 clients as presents. Which statement is TRUE?
A. This action is prohibited because each single gift is in excess of the MSRB gift limit
B. This action is prohibited because the aggregate value of the gifts is in excess of the MSRB gift limit
C. This action is prohibited because the MSRB does not allow gifts to be given
D. This action is permitted
The best answer is D.
The MSRB limits gifts related to one’s activities as a municipal securities representative to $100 value per person per year.
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.
All of the following must be approved or reviewed by the municipal principal EXCEPT each:
A. Official Statement
B. New Account
C. Municipal Transaction
D. Customer Complaint
The best answer is A.
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. The Official Statement is the disclosure document for new municipal issues prepared by the bond counsel - since it is lawyer prepared, there is no requirement for municipal principal approval of the document.
All of the following must be approved or reviewed by the municipal principal EXCEPT:
A. Each New Account
B. Each Municipal Transaction
C. Each Customer Complaint
D. Each Official Statement
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. The Official Statement is the disclosure document for new municipal issues prepared by the bond counsel - since it is lawyer prepared, there is no requirement for municipal principal approval of the document.
Under MSRB rules, all of the following statements are true regarding a broker-dealer recommending municipal securities EXCEPT:
A. the broker-dealer must have reasonable grounds for making any recommendation
B. the broker-dealer must have reasonable grounds to believe that the recommendation is suitable for the customer
C. if the customer refuses to disclose significant financial information, no recommendation can be made
D. if the customer refuses to disclose significant financial information, recommendations can still be made
The best answer is D.
Under MSRB rules, when recommending municipal securities, the broker-dealer must have reasonable grounds for making any recommendation; the broker-dealer must have reasonable grounds to believe that the recommendation is suitable for the customer; and if the customer refuses to disclose significant financial information, no recommendation can be made. While it may be the case that a customer wishes to keep his or her financial information private, if he or she fails to provide sufficient information about his or her financial status or investment objectives, recommendations cannot be made. However, unsolicited transaction are still permitted.
Under MSRB rules, which of the following statements is TRUE regarding a broker-dealer recommending municipal securities?
A. If the customer refuses to disclose significant financial information, unsolicited trades can still be made
B. The broker-dealer does not need reasonable grounds for making recommendations since municipal bonds are very safe
C. If the customer refuses to disclose significant financial information, no trades can be made
D. If the customer refuses to disclose significant financial information, recommendations can still be made
The best answer is A.
Under MSRB rules, when recommending municipal securities: the broker-dealer must have reasonable ground for making any recommendation (this is common sense); the broker-dealer must have reasonable grounds to believe that the recommendation is suitable for the customer; and if the customer refuses to disclose significant financial information, no recommendations can be made While it may be the case that a customer wishes to keep his financial information private, if he or she fails to provide sufficient information, on his financial status or investment objective, recommendations CANNOT be made! (Note: unsolicited transactions would still be acceptable.)
A municipal dealer is reoffering 7% bonds which he bought at par. Which two of the following quotes would BOTH be considered “fair and reasonable”?
A. 6.00 % and 108
B. 6.00 % and 100 1/2
C. 6.90 % and 108
D. 6.90 % and 100 1/2
The best answer is D.
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.
A municipal dealer is reoffering 7% bonds which were bought at par. Which two of the following quotes would BOTH be considered “unreasonable”?
A. 108 and 6.00 %
B. 100 1/2 and 6.00 %
C. 108 and 6.90 %
D. 100 1/2 and 6.90 %
The best answer is A.
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.
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.
Of the quotes given for this 7% coupon bond purchased by the dealer at par, 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 a discount or premium must include all of the following EXCEPT:
A. the yield at which the transaction was effected and the resulting dollar price
B. whether the securities are callable
C. capacity in which the broker-dealer acted
D. the rating assigned to the bond by a national ratings agency
The best answer is D.
Confirmation information that must be shown for municipal bonds traded at a discount or premium from par includes the yield at which the transaction was effected (which will differ from the stated rate of interest because the bonds were not traded at par) and the resulting dollar price; 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.
There is no requirement to disclose the bond’s rating on the confirmation.
Under MSRB rules, confirmation disclosure for bonds sold at a discount or premium must include which of the following EXCEPT:
A. The yield at which the transaction was effected and the resulting dollar price
B. Whether the securities are callable
C. Capacity in which the broker-dealer acted
D. Name of retail counter-party
The best answer is D.
Aside from Choice D, all of the confirmation information listed must be shown for municipal bonds traded at a discount or premium from par.
These include the yield at which the transaction was effected (which will differ from the stated rate of interest because the bonds were not traded at par) and the resulting dollar price; 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.
The name of the retail counter-party (the client who was on the other side of the trade) would not be on the confirmation.
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, the Chairman is considered to be a(n):
A. affiliated person
B. insider
C. control person
D. related party
The best answer is C.
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. The existence of the control relationships must be disclosed verbally to customers when the security is recommended; and in writing either at or prior to confirmation of sale.
A control relationship is deemed to exist between a municipal broker-dealer and an issuer. Under MSRB rules, this must be disclosed to customers if the dealer is effecting which of the following transactions?
A. Principal transactions only
B. Primary Market transactions only
C. Secondary Market transactions only
D. All Primary and Secondary transactions
The best answer is D.
If a municipal control relationship exists between an issuer and a municipal broker-dealer, this must be disclosed to the customer at, or prior, to confirmation of sale. This is required for all transactions (primary/secondary/agent/principal) where a control relationship exists.
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 would NOT lead to regulatory scrutiny?
A. Guaranteeing a customer account against loss
B. Recommending the purchase of a put option to the customer as protection against loss
C. Agreeing to repurchase bonds from a customer personally at a preset price
D. Recommending the purchase of municipal bonds in an IRA
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. Repurchase agreements using exempt securities are not defined as a “guarantee” 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).
Municipal bonds should never be purchased in an IRA because they have a lower yield than taxable investments. An IRA account grows tax deferred and the client’s interests would be better served by purchasing higher-yielding taxable issues.
All of the following statements are true regarding the requirements of the MSRB for handling written customer complaints EXCEPT:
A. All customer complaints must be resolved
B. If the customer alleges in a complaint that there has been a monetary loss, the MSRB must be notified
C. The municipal principal must handle the resolution of each written customer complaint
D. The municipal principal must retain a file of all customer complaints with their resolution
The best answer is B.
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 have enforcement power. The MSRB would simply hand the complaint to FINRA, who enforces MSRB rules for broker-dealers.
A municipal bond dealer typically engages in all of the following activities EXCEPT:
A. distributing bona-fide quotes to interested parties
B. participating in syndicates bidding on new issues
C. shorting bond issues in expectation of missed interest payments
D. acting as an agent, buying and selling positions for customers
The best answer is C.
Municipal dealers participate in bidding for new issues, distribute quotes; take inventory positions (long positions) in municipal issues; and handle transactions for customers on an agency basis. Short positions are not taken due to the thin trading market for municipals, which makes short covering difficult.
A customer wishes to purchase $100,000 face amount of municipal bonds that the broker-dealer does not have in inventory. Under MSRB rules, the firm should:
A. contact at least 4 dealers and obtain quotes for the customer
B. make sure the client has a copy of the Official Statement prior to accepting the order
C. act as agent, charging the customer a commission in the transaction
D. act as a dealer, charging the customer a mark-up in the transaction
The best answer is C.
Under MSRB rules, when a municipal dealer acts in an agency capacity, the price charged must be representative of the market for that type of security. There is no requirement to obtain a pre-set number of quotes. Since the municipal firm is acting as an agent (middleman) in the transaction, a commission is charged. There is no requirement to provide a client with a copy of the Official Statement prior to executing a secondary market trade. The Official Statement is a municipal new issue disclosure document.
A customer wishes to purchase $100,000 face amount of municipal bonds that the broker-dealer does not have in inventory. Under MSRB rules, the firm should:
A. refer the customer to a municipal firm that has the B. contact at least 5 dealers and obtain quotes for the customer
C. contact enough dealers so that a reasonable market quote is obtained
D. recommend the purchase of a similar security that the dealer has in inventory
The best answer is C.
Under MSRB rules, when a municipal dealer acts in an agency capacity, the price charged must be representative of the market for that type of security. There is no requirement to obtain a pre-set number of quotes nor is there a requirement to direct the customer to a dealer that physically has those bonds.
A customer wishes to purchase $100,000 face amount of municipal bonds that the broker-dealer does not have in inventory. Under MSRB rules, the firm should:
A. sell short the security to the customer
B. refer the customer to a municipal firm that has the bonds in inventory
C. contact at least 5 dealers and obtain quotes for the customer
D. contact enough dealers so that a reasonable market quote is obtained
The best answer is D.
Under MSRB rules, when a municipal dealer acts in an agency capacity, the price charged must be representative of the market for that type of security. There is no requirement to obtain a pre-set number of quotes, nor is there a requirement to direct the customer to a dealer that physically has those bonds. The dealer would not sell short the bonds to the customer, since short covering is very difficult in the thinly traded municipal market.
Under MSRB rules, which of the following documents, if prepared, must be sent to the purchaser of a new issue municipal bond?
A. Prospectus
B. Legal Opinion
C. Official Notice of Sale
D. Official Statement
The best answer is D.
The MSRB requires that all purchasers of new issue municipal bonds receive a Final Official Statement, if one has been prepared. If the Final is not going to be prepared, but a Preliminary Official Statement is available, then this document must be sent.
Which statement is TRUE regarding the Official Statement?
A. The Official Statement is required by the Securities Act of 1933 for all new municipal issues
B. The Official Statement is required by the MSRB and must be given to underwriters to satisfy their SEC due diligence requirements
C. The Official Statement is required to be delivered to customers at, or prior to settlement, if available
D. The Official Statement is required to be delivered only to those customers who request one in writing
The best answer is C.
The Official Statement for a new municipal issue is not required under the Securities Act of 1933 since municipal issues are exempt, nor is it required by the MSRB, since the MSRB has no regulatory authority over municipal issuers. It is requested by underwriters to help them perform due diligence on the offering (as required by the SEC) and also to help sell the issue. The MSRB states that if the Official Statement is available, it must be given to purchasers at, or prior to, settlement of sale.
The Official Statement is:
A. required by the Securities Act of 1933 for all new issue municipal bonds
B. required to be delivered under the Trust Indenture Act of 1939 at or prior to settlement, if available
C. required by the MSRB for all new issue municipal bond offerings exceeding $5,000,000
D. requested by underwriters to satisfy SEC due diligence requirements and the disclosure requirements of new issue purchasers
The best answer is D.
The Official Statement for a new municipal issue is not required under the Securities Act of 1933 since municipal issues are exempt, nor is it required by the MSRB, since the MSRB has no regulatory authority over municipal issuers. Municipal bonds are also not subject to the Trust Indenture Act of 1939.
This document is requested by underwriters to help them perform due diligence on the offering (as required by the SEC) and also to help sell the issue. The MSRB states that if one is available, it must be given to purchasers at or prior to settlement of sale.
Under MSRB rules, if a Final Official Statement is not yet ready, at the time of settlement of a new municipal securities purchase:
A. the transaction becomes void
B. settlement is delayed until the Final Official Statement is prepared
C. the customer will be sent a copy of the Preliminary Official Statement
D. the customer will be sent an abstract of the Official Statement
The best answer is C.
Under MSRB rules, if a Final Official Statement is being prepared but is not yet ready at the time of settlement, the customer would receive a copy of the Preliminary Official Statement. An abstract of the Official Statement is a broker-prepared summary - this is not permitted. The transaction does not become void, nor is settlement delayed, if the Final Official Statement is not ready at settlement date.
Which of the following must be disclosed, or be disclosed upon customer request, in competitive bid municipal underwritings?
A. Spread
B. Names of other buyers off the issue
C. Participation amount of each underwriter
D. Order priority provisions
The best answer is D.
In competitive bid municipal underwritings, the offering price of each maturity must be disclosed, but there is not requirement to disclose the spread, which is typically very thin.
There is no requirement to disclose the participation amounts of the underwriters (since this in no way affects the customer).
However, the order priority provisions must be disclosed (the usual priority is Pre-Sale; Group Net; Designated; Member Takedown-remember; Pro Golfers Don’t Miss!).
Obviously, the names of other clients who purchased the issue are confidential.
Which of the following must be disclosed in negotiated municipal underwritings?
A. Initial offering price of each maturity but not spread
B. Initial offering price of each maturity and the underwriter’s discount
C. Participation amount of each underwriter
D. Names of the underwriters
The best answer is B.
In negotiated municipal underwritings, the spread (underwriter’s discount) and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters (though this information is readily available) nor their participation amounts (since this in no way affects the customer).
If a municipality’s financial advisor wishes to act as underwriter of that issue in a negotiated offering, which statement is TRUE?
A. The underwriter must use 2 independent municipal firms to establish the offering price
B. The underwriter must disclose to the issuer in writing all anticipated remuneration to be received from the issuer
C. The issuer must be informed in writing of the potential conflict of interest
D. The financial advisor is prohibited from acting as the underwriter in the bond offering
The best answer is D.
A financial advisor to a municipality receives an advisory fee for helping a municipality structure a new bond issue, with the goal of getting the lowest interest cost for the issuer. An underwriter for a new municipal issue wants to get the highest interest rates possible on the bonds, because it makes them easier to sell. Thus, there is an inherent conflict of interest between the two.
The MSRB rule on this is simple - the financial advisor cannot be the underwriter. It makes no difference if the underwriting is competitive bid or negotiated.
A broker-dealer who acted as financial advisor to a municipality in structuring a new issue now wishes to act as underwriter in the bond offering. Which statement is TRUE?
A. This is permitted without restriction
B. This is only permitted for competitive bid underwritings
C. This is only permitted for negotiated underwritings
D. This is prohibited for both competitive bid and negotiated underwritings
The best answer is D.
A financial advisor to a municipality receives an advisory fee for helping a municipality structure a new bond issue, with the goal of getting the lowest interest cost for the issuer. An underwriter for a new municipal issue wants to get the highest interest rates possible on the bonds, because it makes them easier to sell. Thus, there is an inherent conflict of interest between the two.
The MSRB rule on this is simple - the financial advisor cannot be the underwriter. It makes no difference if the underwriting is competitive bid or negotiated.
MSRB rules allow all of the following when selling a new issue of municipal bonds EXCEPT:
A. orally agreeing to repurchase the bonds at an agreed price
B. not disclosing the spread on reofferings of competitively bid issues
C. providing a customer with a Preliminary Official Statement if the Final Official Statement is not yet available at settlement
D. disclosing order priority provisions upon the request of customers
The best answer is A.
Oral agreements to repurchase municipal securities at a fixed price are prohibited - any repurchase agreement must be detailed in writing.
MSRB rules on new issue disclosure require that the spread be disclosed on “negotiated” offerings. There is no spread disclosure on competitive bid offerings.
MSRB rules also allow a Preliminary Official Statement to be sent at settlement if a Final Official Statement is not yet prepared; and require that order priority provisions be disclosed on customer request.
Under MSRB rules, all of the following are defined as advertisements EXCEPT:
A. Form Letters
B. Circulars
C. Official Statements
D. Abstracts or Summaries of Official Statements
The best answer is C.
The MSRB defines as “advertising” any form letters, circulars, sales literature, and abstracts of Official Statements (since these would be written by the firm). Excluded from the definition are Official Statements, since their content is similar to Prospectuses, and they are subject to legal oversight (Official Statements are written by the Bond Counsel).
All of the following statements are true regarding municipal advertising EXCEPT:
A. all municipal advertising must be approved by either the Municipal Principal or General Principal prior to use
B. copies of municipal advertising must be retained by the member for 4 years
C. municipal advertising cannot be materially false or misleading
D. form letters are exempted from the advertising rules
The best answer is D.
All municipal advertising must be approved in advance of use by a municipal principal or general securities principal and copies must be retained for 4 years (note in contrast that FINRA’s rule is 3 years). Advertisements cannot be materially false or misleading.
Official Statements, prospectuses, and other similar “lawyer prepared” documents are exempted from the advertising rules. Such documents are exempted because their content is legally dictated and is not promotional in nature.
Form letters are defined as advertising, as are notices, circulars, reports, market letters and reprints of these items.
Municipal securities advertising may be approved prior to use by which of the following?
A. A Municipal Securities Principal only
B. A Financial and Operations Principal only
C. Municipal Securities Rulemaking Board
D. A General Principal or a Municipal Securities Principal
The best answer is D.
Municipal securities advertising must be approved prior to use by either a municipal securities principal or general principal. The financial principal (the firm’s accountant) cannot approve advertising. There is no requirement to file municipal advertising with the MSRB for their approval - they wouldn’t know what to do with it since they can’t enforce their own rules (remember, FINRA does this for the MSRB).
A municipal securities firm places the following advertisement:
“We Hold and Sell New York State 6% TANs”
Under MSRB rules, which statement is TRUE?
A. The advertisement must also show the maturity of the notes
B. The advertisement must state whether the percentage rate shown is the coupon or yield
C. The advertisement must show the tax equivalent yield for an investor in the top tax Federal bracket
D. The advertisement must show the bond rating assigned by Moody’s or Standard and Poor’s
The best answer is B.
Under MSRB rules, any advertisement that shows an interest rate or yield must state whether the rate of return shown is the coupon rate or the yield to maturity; and if the yield is being shown, it must be stated if it is yield to maturity, or yield to call date.
A municipal securities firm based in Los Angeles that effects transactions solely on an principal basis places the following advertisement in the local newspaper:
“We Search The Market To Buy Bonds
To Fill Your Orders At The Lowest Price!”
Which statement is TRUE regarding this advertising claim?
A. This is prohibited under MSRB rules because such ads can only be placed in trade publications
B. This is prohibited under MSRB rules because the statement is materially untrue
C. This is prohibited under MSRB rules because the advertisement must be approved by the MSRB prior to use
D. This is permitted under MSRB rules without restriction
The best answer is B.
Since this firm effects trades solely on a principal basis, it carries inventory and is a market maker. Thus, its claim to “search the market to fill your order” for municipal bonds is untrue, since the firm only sells out of inventory as a dealer. The MSRB does not require any filing of advertising, and advertisements can be placed in any medium. However, statements made in advertising cannot be fraudulent.
A municipal securities firm based in Los Angeles that effects transactions solely on an agency basis places the following advertisement in the local newspaper:
“We Are Market Makers Of Large Sizes
In Los Angeles General Obligation Bonds”
Which statement is TRUE regarding this advertising claim?
A. This is prohibited under MSRB rules because dealer ads can only be placed in trade publications
B. This is prohibited under MSRB rules because the statement is materially untrue
C. This is prohibited under MSRB rules because the advertisement must be approved by the MSRB prior to use
D. This is permitted under MSRB rules without restriction
The best answer is B.
Since this firm effects trades solely on an agency basis, it carries no inventory and is not a market maker. Thus, its claim to make large size markets in municipal bonds is untrue. The MSRB does not require any filing of advertising, and advertisements can be placed in any medium. However, statements made in advertising cannot be fraudulent.
A registered representative at a member firm only deals in stocks and other equity investments. The registered representative helps an associate at that firm negotiate an underwriting of municipal bonds with a municipal issuer official that he knows very well from other business dealings. He does this as a 1-time event and is paid a finder’s fee for his help. Which statement is TRUE?
A. Because this was a 1-time event, the registered representative is not considered to be a Municipal Finance Professional and is not subject to the political contribution rule
B. The registered representative is considered to be a Municipal Finance Professional and is subject to the political contribution rule
C. Any registered representative at a member firm is defined as Municipal Finance Professional and is subject to the political contribution rule
D. Any registered representative at a member firm is excluded from the definition of a Municipal Finance Professional and is exempt from the political contribution rule
The best answer is B.
An “MFP” - a Municipal Finance Professional - is an associated person who solicits business from municipal issuers, renders financial advisory services to municipal issuers, or who performs research or writes reports on municipal issues. Because the representative was paid a finder’s fee for helping get the municipal underwriting business from the issuer, that registered representative is defined as an MFP and comes under the $250 political contribution limit.
Which of the following individuals is a Municipal Finance Professional (MFP) ?
A. An associated person who handles the accounts of individual customers
B. A clerical employee that processes municipal bond allocations
C. A municipal principal that supervises municipal underwritings
D. The broker-dealers’s CEO
The best answer is C.
Under Rule G-37 covering political contributions, a Municipal Finance Professional is defined as an associated person (not a clerical employee) that solicits business from issuers or that performs advisory work or research for issuers. Any municipal principal that supervises these functions is also an MFP. An associated person that deals with individual customers is excluded from the definition, as are the executive officers of the dealer.
A Municipal Finance Professional (MFP) and her spouse draw a $500 check from their joint checking account and submit it to a local mayoral campaign. Which statement is TRUE?
A. The contribution can be made without subjecting the member firm to a 2-year ban only if the MFP can prove that she and her husband wanted to equally contribute $250 each to the candidate
B. The contribution can be made without subjecting the member firm to a 2-year ban if both the MFP and spouse sign the check
C. The contribution can be made without subjecting the member firm to a 2-year ban regardless of whose signature is on the check
D. The contribution will cause the member firm to be subject to a 2-year ban prohibiting the firm from engaging in municipal securities business with that issuer
The best answer is B.
If a Municipal Finance Professional and any other person sign a check for a campaign contribution drawn on their joint account and submit it to an issuer official as a contribution, each person is deemed to have made ½ the contribution under an MSRB interpretation. Thus, ½ of the $500 contribution = $250 - the maximum that can be contributed without subjecting the member firm to a ban.
A registered representative (“rr”) is an MFP of a municipal securities firm that is an underwriter for that municipal issuer. The MFP volunteers his time to the election campaign of a candidate for mayor of the issuer by offering to host a reception. The “rr,” who is entitled to vote in the election, does not make a contribution to the elected official’s campaign, but does pay $300 of “out of pocket” expenses for the cost of the reception. Which statement is TRUE?
A. This is permitted under MSRB rules because the MFP is volunteering his time to the elected official’s campaign
B. The $300 of “out of pocket” expenses exceeds the MSRB’s political contribution limit and will result in the municipal securities firm being banned as an underwriter for that issuer for 2 years
C. The $300 of “out of pocket” expenses are permitted because the MSRB places a $500 limit on the value of services that can be volunteered to each election campaign by an MFP
D. Because the MFP is entitled to vote in the elected official’s campaign, he or she is permitted to make a contribution, up to the maximum federal limit of $1,000
The best answer is B.
The MSRB political contribution limit of $250 placed on an MFP (Municipal Finance Professional) applies not only to cash contributions, but also to “anything of value” given to an elected official’s campaign. Thus, the $300 of expenses paid by the MFP for the reception exceeds the $250 limit, and the broker-dealer would be subject to a 2-year ban doing negotiated underwritings for that issuer.
If a municipal securities firm is subject to a 2-year ban under MSRB Rule G-37, it would be permitted to:
A. act as a financial advisor to that municipality during the period of the ban
B. place a bid for a competitive offer of general obligation bonds being sold at auction by that issuer
C. negotiate with the issuer to be the underwriter on a revenue bond offering
D. do none of the above
The best answer is B.
The 2-year ban applies to engaging in municipal securities business with that issuer. Municipal securities business includes acting as a financial advisor to that issuer or performing negotiated underwritings for that issuer. It does not include competitive bid underwritings because “favoritism” does not decide the outcome of the auction. Rather, the lowest interest rate bidder wins.
If a Municipal Finance Professional gives more than $250 to an elected official’s campaign in which the MFP is entitled to vote, then the:
A. MFP is banned for 1 year from being associated with a municipal securities dealer
B. municipal securities firm employing the MFP is banned for 1 year from engaging in municipal securities business with that issuer
C. MFP is banned for 2 years from being associated with a municipal securities dealer
D. municipal securities firm employing the MFP is banned for 2 years from engaging in municipal securities business with that issuer
The best answer is D.
The MSRB political contribution rule is intended to stop so-called “pay to play” practices, where a person associated with a municipal firm would give large dollar contributions to the campaign of an elected official, and in return, the elected official would steer that issuer’s upcoming underwritings to that municipal firm.
The maximum amount that can be given by an MFP to an elected official’s campaign in which the MFP is entitled to vote is $250 without any problems.
If more than $250 is contributed, then that firm is banned from engaging in municipal securities business with that issuer for the next 2 years.
A Municipal Finance Professional (MFP) gave $550 to the election campaign of her next door neighbor, who is running for the office of mayor of her town. Which statement is TRUE?
A. There is no impact on the municipal securities firm because of the political contribution
B. The political contribution will result in a ban on the municipal securities firm performing negotiated underwritings for that issuer for 1 year
C. The political contribution will result in a ban on the municipal securities firm performing negotiated underwritings for that issuer for 2 years
D. The political contribution will result in a ban on the municipal securities firm performing negotiated underwritings for that issuer for 3 years
The best answer is C.
An MFP (Municipal Finance Professional) can give up to $250 to an elected official’s campaign in which he or she is entitled to vote with no problems. If more is given, the employing firm will be banned from engaging in municipal securities business with that issuer for 2 years. Municipal securities business includes performing negotiated underwritings or municipal advisory work for that issuer. It does not include competitive bid underwritings, because the decision of the underwriter cannot be “influenced.”
An MFP (Municipal Finance Professional) lives in Hoboken, New Jersey. Her classmate from college, with whom she has maintained a close friendship for the past 15 years, is running in a campaign to become mayor of Newark, New Jersey. To show her support for her friend, the MFP sends a $150 check to her election campaign. Which statement is TRUE?
A. This will result in her employing municipal securities firm being banned from engaging in municipal securities business with Hoboken, New Jersey for the next 2 years
B. This will result in her employing municipal securities firm being banned from engaging in municipal securities business with Newark, New Jersey for the next 2 years
C. This will result in her employing municipal securities firm being banned from engaging in municipal securities business with both Newark and Hoboken New Jersey for the next 2 years
D. This will not result in a ban because the amount given is less than the $250 de minimis limit
The best answer is B.
An MFP (Municipal Finance Professional) can give up to $250 to an elected official’s campaign in which he or she is entitled to vote with no problems. If more is given, the employing firm will be banned from engaging in municipal securities business with that issuer for 2 years.
In addition, if an MFP gives ANY amount to an elected official’s campaign in which he or she is not entitled to vote, this will result in a ban. This is the situation in this question. The issue here is so-called “pay-to-play” - that by giving big election campaign contributions, the elected official, if he or she wins, could steer future underwriting business to the MFP’s employer.
Municipal securities business includes performing negotiated underwritings or municipal advisory work for that issuer. It does not include competitive bid underwritings, because the decision of the underwriter cannot be “influenced.”
A Municipal Finance Professional (MFP) who lives in San Francisco makes a political contribution to the election campaign of an individual running for mayor of Los Angeles. Which statement is TRUE about this?
A. There is no violation of Rule G-37 if the amount of the contribution is less than $250
B. There is a violation of Rule G-37 because the contribution was made to a campaign where the MFP is not entitled to vote
C. There is no violation of Rule G-37 because the rule would only apply to contributions made to candidates running for office in San Francisco
D. There is a violation of Rule G-37 because MFPs are not permitted to make contributions to the campaigns of any candidates running for election
The best answer is B.
Under MSRB Rule G-37, a Municipal Finance Professional can give up to $250 to an elected official’s campaign in which the MFP is entitled to vote without any problems. If the amount given is more than $250, or if ANY dollar amount is given to an elected official’s campaign in which the MFP is not entitled to vote (as in this case), then the municipal broker-dealer is banned from doing negotiated underwritings and municipal financial advisory work for that municipality for 2 years.
A non-MFP (non-Municipal Finance Professional) contributes $500 to an elected official’s campaign in which he is entitled to vote. Which statement is TRUE about this?
A. This action will result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the amount exceeded $250
B. This action will result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the individual was not entitled to vote
C. This action will not result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the MSRB rule only applies to MFPs
D. This action will not result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the amount involved is under the “de minimis” exemption
The best answer is C.
The MSRB political contribution rule only applies to contributions made to elected officials’ campaigns by “MFPs” - Municipal Finance Professionals. MFPs are registered individuals in municipal finance departments and their supervisors.
If a non-MFP, such as a typical registered representative, gives a political contribution of any amount to an elected official’s campaign in which he or she is, or is not, entitled to vote, this will not trigger a ban! Non-MFPs are not in a position to use campaign contributions as “payment” to an issuer official in return for getting future underwritings or financial advisory work from that municipality - so the rule does not apply.
A non-MFP (non-Municipal Finance Professional) contributes $300 to an elected official’s campaign in which he is not entitled to vote. Which statement is TRUE about this?
A. This action will result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the amount exceeded $250
B. This action will result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the individual was not entitled to vote
C. This action will not result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the MSRB rule only applies to MFPs
D. This action will not result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the amount involved is under the “de minimis” exemption
The best answer is C.
The MSRB political contribution rule only applies to contributions made to elected officials’ campaigns by “MFPs” - Municipal Finance Professionals. MFPs are registered individuals in municipal finance departments and their supervisors. If a non-MFP, such as a typical registered representative, gives a political contribution of any amount to an elected official’s campaign in which he or she is, or is not, entitled to vote, this will not trigger a ban!
A municipal issuer official has lost her re-election campaign and has just left elected office. She is soliciting political contributions in a “clean-up” campaign to settle her campaign debt. Which statement is TRUE about an MFP that wishes to contribute $500 to the “clean-up” campaign?
A. The MFP is prohibited from contributing any amount to the clean-up campaign
B. Because the contribution exceeds $250, the municipal securities firm will be subject to a 2-year ban on engaging in municipal securities business with that issuer
C. Because the issuer official no longer holds elected office, the contribution limits of Rule G-37 do not apply
D. Only municipal dealers, not MFPs, are permitted to contribute to clean-up campaigns, so the firm will be subject to a 2-year ban on engaging in municipal securities business with that issuer
The best answer is C.
Because this person is out of elected office at the time of soliciting money to pay for the election debt, she is no longer considered to be an “issuer official” and Rule G-37 no longer applies. Note that if she still were in her elected position (e.g., during the time window between losing the re-election campaign and the date when she left office), then the rule limiting contributions to $250 would still apply (otherwise the municipal securities firm would be subject to a 2-year ban). Since she is out of office, she is not in a position to direct underwriting business to a municipal firm, so G-37 is not applicable.
Under MSRB rules, all of the following records must be kept for specified time periods EXCEPT:
A. Trade comparisons
B. Preliminary Official Statements
C. Customer account statements
D. Customer complaints
The best answer is B.
There is no requirement to keep Official Statements filed at the firm. The underwriter for the issuer files a copy of the Official Statement with the MSRB, which puts it up on its EMMA website for public access.
Under MSRB rules, which of the following records is NOT required to be kept for specified time periods?
A. Official Statements
B. Trade comparisons
C. Customer account statements
D. Customer complaints
The best answer is A.
There is no requirement to keep Official Statements filed at the firm. The underwriter for the issuer files a copy of the Official Statement with the MSRB, which puts it up on its EMMA website for public access.
Under MSRB rules, any claim, dispute, or controversy shall be submitted to arbitration at the instance of all of the following EXCEPT a:
A. customer against a broker-dealer
B. broker-dealer against a customer who has previously signed an arbitration agreement
C. broker-dealer against a customer who has not previously signed an arbitration agreement
D. broker-dealer against another broker-dealer
The best answer is C.
MSRB rules require that arbitration be used to settle disputes where a claim is initiated from broker-dealer to another broker-dealer (Choice D).
If a customer initiates a claim against a broker-dealer via the MSRB’s arbitration procedure, then the matter must be resolved by arbitration (Choice A). Please note that instead of choosing arbitration, the customer could bring action in court, as long as the customer did not sign an arbitration agreement when the account was opened.
If a dispute exists where a broker-dealer has a claim against a customer and that customer has signed an arbitration agreement, then the matter must be resolved by arbitration (Choice B).
On the other hand, if a broker-dealer initiates a claim against a customer and the customer has not signed an arbitration agreement, then the customer cannot be forced to arbitration (Choice C).
All of the following information is available on EMMA EXCEPT:
A. Official Statements for municipal bond issues, notes, and 529 plans
B. Details of bonds that have been pre-refunded
C. Real-time prices and yields for municipal bond trades, as reported through RTRS
D. 10Qs and 10Ks
The best answer is D.
Consider this to be a learning question about EMMA (Electronic Municipal Market Access). The EMMA web portal, run by the MSRB, makes available to the investing public:
- **Official Statements, Preliminary Official Statements, Advance Refunding Documents, and Event Notices;
- **Real time reporting of municipal bond trades through RTRS (Real Time Reporting System); and
- **Real time reporting of municipal note trades through SHORT (Short-Term Obligation Rate Transparency System).
10Qs and 10Ks are corporate disclose documents that would be found on a similar system named EDGAR.
