Part 1 Understanding SEC and MSRB Rules Regarding MAs 12% of Exam 20-30 Questions Flashcards
1.1 ASSESS APPLICATION OF SEC AND MSRB RULES TO FIRM ACTIVITIES
Duty of Loyalty
Acting in the best interest of the client with no self-interest.
MAs must make written disclosure of all material conflicts of interest.
Duty of Care
Responsibility of possessing the knowledge and expertise to give good advice.
When does Duty of Loyalty & Care Apply
when advising municipal entities
Is Duty of Loyalty or Duty of Care needed when advising an obligated person?
Duty of Care
Municipal Advisors
Firms
Municipal Advisor Representatives and Municipal Advisor Professionals (MAPs)
The individuals that provide advice on behalf of the MA
Municipal Entity definition under the Dodd Frank Act
-A state, a state political subdivision, or a municipal corporate instrumentality, or any of its agencies and authorities
-Any plan, program, or pool of assets sponsored or established by a state or state political subdivision or municipal corporate instrumentality (or by their agencies, authorities, or instrumentalities), or
-Any other issuer of municipal securities
Obligated Person definition under the Dodd Frank Act
-An entity, such as a nonprofit university or nonprofit hospital that borrows the proceeds from a municipal securities offering and is obligated by contract or another agreement to repay all or some portion of the amount borrowed
A financial advisor to a municipality cannot participate as a syndicate or selling group member in either a competitive or negotiated offering of municipal securities.
MAs must complete an annual needs analysis that identifies the specific training needs of their associates. The unique scope of the business, the fiduciary obligations to customers, and regulatory updates are among the topics that should be included. Training completed by advisor representatives that hold other registrations may fulfill the requirement if it satisfies the needs defined in the analysis.
As defined by MSRB rules, a control relationship exists when an individual associated with a member firm (or the firm itself) is in a position to influence an issuer’s actions regarding the issuance of or payment of interest or principal on an issue of municipal securities. A small campaign contribution, residence within a community, and doing business with the municipality to don create a control relationship.
The Securities Acts Amendments of 1975
-Established the MSRB as the self-regulator for the securities industry.
MSRB makes rules but does not enforce them.
SEC
-Oversees the securities industry, including municipal securities.
-Enforces laws like the Act of 1933 and Act of 1934.
Anti-Fraud Provisions
Under the Acts of 1933 and 1934, it is unlawful for any party to engage in fraudulent or deceptive practices in the offer, sale, or trading of securities, including municipal securities.
Securities Act of 1933
-Full and fair disclosure to investors so that they have sufficient info to make investment decisions
-Regulates new issue market
-All non-exempt securities must register for lawful sale
-Registration statement is filed with SEC
-includes prospectus for disclosure
Exemptions from Act of 1933
-Municipal and government securities do not need to register; however, investors must still receive full and fair disclosure of material information
-While municipal securities are exempt from the registration requirements of 1933, they are not exempt from certain anti-fraud provisions - material omission or misstatements of acts and deceptive schemes or conduct in the issuance, purchase, and sale of new securities
Material Information
Info that an investor would find important when making an investment decision
Securities Act of 1934
-regulates secondary marketplace
-prohibits fraud
-created by SEC
-requires registration of B/Ds, investment advisors, and municipal securities brokers and dealers
-Regulation of exchanges and trading markets
-limitations and prohibitions on trading activities by insiders
-recordkeeping requirements
-periodic reporting requirements for issuers
-MAXIMUM period of suspension is 12 months
The Act of 1934 states that is unlawful for persons (entities or individuals) that sell securities or represent issuers thru any media or form of commerce to:
-employ any device, scheme, or artifice to defraud
-make any untrue statement of a material fact or omit a material fact
-engage in fraudulent or deceitful act, practice, or course of business in connection with the purchase or sale of any security
Dodd Frank establishes recklessness without intent as a regulatory violation.
Dodd Frank Whistleblower Program
-awards for reporting over $1 million
-reward is 10-30% of sanctions collected
-prohibits retaliation
Act of 1934 forbids fraud in securities transactions, and applies to both securities that are subject to registration requirements and to those that are exempt such as government and municipal securities.
Form MA
MA firm must register with SEC as a MA
Form MA-I
for each individual associated with the firm that engages in municipal advisory actions
Form MA-NR
if the firm is a non-resident of the US and files all forms thru the SEC public online filing system EDGAR
Individuals that do MA business as sole proprietors must complete and file Forms MA and MA-I
SEC must grant registration or begin proceedings to deny Form MA within 45 days of submission.
IRMA
Independent Registered Municipal Advisor
IRMA Exemption
-An advisor duly registered with the SEC that has been hired by an issuer or obligated person as its MA to issue financial products, invest proceeds, etc.
-The IRMA can have NO TIES to a firm that is acting as an underwriter
Qualifying for the IRMA Exemption
- The firm retained as an IRMA must be registered with the SEC as a MA, and its advisory team cannot include persons that have been employed within the past two years by the firm seeking to use the exemption. The employees seeking the exemption cannot have worked for the IRMA during the prior two year period.
- The IRMA must receive notice from the municipal entity or obligated person that established the capacity in which the IRMA is retained.
- The notice must be available to firms seeking to use the IRMA exemption
- The firm that wishes to use the exemption must receive a written representation from the municipal entity or obligated person stating the entity will rely on the IRMA’s advice.
- The firm seeking to use the exemptions must provide written disclosures to the municipal entity or obligated person with a copy made available to the IRMA that states the firm is not registered and is not subject to the fiduciary duty. This disclosure must be provided in advance to find any potential conflict of interests.
The SEC’s recordkeeping rules prescribe that all required books and records of municipal advisors be maintained for at least 5 years with the first two years records kept in an easily accessible place.
The names and addresses of current employees are kept, in addition to the names of all persons who have been associated with the advisor. Bank records for all transactions must be kept to maintain compliance with SEC recordkeeping rules.
Official Statements
the principal disclosure document for new issues of securities
Disclosure Requirements / Rule 15c2-12
-The SEC requires municipal issuers to disclose material information regarding their financial conditions and operations.
-The Rule 15c2-12 under the Exchange Act mandates underwriters to ensure that issuers provide continuing disclosures for municipal securities.
Municipal Advisor Rule / Rule 15Ba1-1
Municipal advisors are required to register with the SEC and adhere to rules governing their activities, including advising issuers about the structure of municipal securities.
MSRB
- Following registration with the SEC, MA must register with the MSRB prior to engaging in any investment advisory activities. The process begins with the submission of FORM A-12.
- The MSRB requires municipal advisors to appoint a primary regulatory contact to serve as an official contact for purposes of regulatory notices.
- The MSRB requires new registrants to pay an initial fee of $1000 and an annual fee of $1000.
- Annual Affirmation Period - commences on Jan 1 of each calendar year and continues for 17 business days.
Associated Persons
Persons that engage in advisory activities on behalf of MA firms.
-Municipal Advisory Representatives
-Municipal Advisory Principal
Municipal Advisory Representative
an individual who engages in municipal advisory activities on the firm’s behalf
Municipal Advisory Principal
a natural person that is directly engaged in the management, direction, or supervision of a muncipal advisors activities.
MSRB rules do not apply to registration of new issues. Municipal issues are exempt from registration requirements under the Securities Act of 1933. The rules of the MSRB cover standards of professional qualification, compliance examinations, confirmations, clearance, settlement and many other aspects of doing business in municipal securities.
When filing an A-12 to register as a municipal advisor, the firm must identify the following contacts: master account administrator, primary regulatory contact, billing contact, compliance contact, and primary data quality contact. The principals must be designated in the supervisory procedures of the firm.
Recordkeeping Requirements
Municipal advisors, like all other firms subject to MSRB regulation must keep records of gifts and gratuities. Records of correspondence, like most MSRB and SEC records, must be kept for 6 years. Firms may keep records electronically, but they are not required to do so. Business records of terminated firms must be kept for at least three years after the termination date or withdrawal from registration.
The SEC’s recordkeeping rules prescribe that all required books and records of municipal advisors be maintained for at least 5 years with the first two years records kept in an easily accessible place. The names and addresses of current employees are kept, in addition to the names of all persons who have been associated with the advisor. Bank records for all transactions must be kept to maintain compliance with SEC recordkeeping rules.
FINRA
makes rules for general securities broker dealers, enforces its own rules and the rules of the MSRB
1.5 MSRB CONDUCT RULES FOR ADVISORS
Fair Dealing - Rule G-17
Establishes a standard for transacting all municipal securities business and advisory activities
*States that all firms and advisors must deal fairly with all entities and individuals with which they do business.
*Applies to virtually every activity involved municipal securities, is the core component to all customer protections rules of the MSRB
*Includes an anti-fraud provision similar to the one in the act of 1934
*Examples of violations of this rule include
*Withholding material information about a transaction
*Failing to disclose material facts about an issuer
*Failing to deliver securities promptly
*Improper use of customer assets and
*Dealing unfairly in any aspect of a transaction
Customer Complaints
*Registered MA’s are required to keep an electronic log of all written complaints.
*The records must be retained for 6 years
*The record must include
*Complainants name, addy, and account number
*Date complaint was received
*Name of any other associated person
*Description of the complaint
*Disposition of the compliant
- Gifts, Gratuities and cash compensation Rule G-20
*Rules provides an exemption from the $100 annual limit for normal business dealings.
*Permits the following forms of non-cash compensation as long as they are not too frequent or so extensive
*Occasional gifts of meals or tickets to theatrical, sporting, and other entertainment events hosted by the dealer.
*Gifts of reminder advertising or logo items of reasonable value
*And reimbursement of travel and meeting expenses.
*Something like a weekly event would be a violation since it could be considered too frequent
*MA firms and broker dealers that engage in municipal securities activities are prohibited from requesting and obtaining reimbursement for entertainment expenses from the proceeds of a securities offering.
*However reasonable expenses for meals hosted by a MA or a broker dealer that are related to the offering may be reimbursed
*Records must be kept for gifts
*Must aggregate all gifts given by the firm and each of its associated person to a particular recipient over the course of a year.
*Firms may track gifts on a calendar year basis, fiscal year or rolling basis, beginning with the first gift to any particular recipient.
Political Contributions / Rule G-37 Pay to Play Rule
*G-37 - Pay to Play Rule - the practice of making political contributions to issuers and other persons to influence municipal securities is regulated under Rule G-37
*Rule requires disclosure of political contributions made by regulated firms and their associated persons.
*Any associated person that is primarily engaged in and receiving fees for advising municipalities on either competitive or negotiated underwriting activity, is classified as a municipal advisor representative subject to MSRB Rule G-37.
*Form G-37 must be filed quarterly with the MSRB when there is reportable political contribution activity. It must be submitted to the MSRB electronically through EMMA using an online data-entry form.
*Broker-Dealers - if political contribution is made that violates this rule the by the professional or by the firm the firm is prohibited from engaging in any negotiated municipal securities business with that issuer for 2 years
*Business bans triggered by G-37 violations apply only to negotiated underwritings , not competitive underwritings.
*MA professionals defined under this rule
*MA representative
*MA solicitor (person contracted directly or indirectly by the MA to find MA business
*MA principal
*MA supervisory chain person
*MA executive officer
*Political Contributions are defined broadly and include stuff like
*Cash donation
*Loans
*Gifts
*Advances
*Subscriptions
*Deposits of money or other valuables
*Municipal firms may be exempted from the 2 year ban in some situations
*The firm discovered the contribution that resulted in the ban within 4 months of the date of the contribution
*Cannot exceed 250
*And must be returned within 60 calendar days of the date of discovery
*Firms are entitled to no more than 2 automatic exemptions per 12 month period.
Political Contribution Rule - De Minimis Exception
*Municipal Advisory professionals are allowed to make contributions without triggering the ban if
*They are entitled to vote for the candidate based on their residence or voting district
*The contribution per election does not exceed $250
*250 is per candidate per election, primary contests are considered separate from the general election.
*Municipal advisor’s and political action committees that are controlled by municipal advisors are not permitted to make political contributions of any amount.
Dealers and MA firms are required to establish and maintain reporting requirements for political contributions and these records must be kept for 6 years after filing.
Political Contributions Rules - Complex Situations
*If a prohibited contribution was made and the individual who made is leaving the original firm they still remain subject to the 2 year period , if he goes to a new firm and is considered a MAP then the new firm is also subject to the 2 year period.
*If a person makes a contribution while not classified as a MAP but then later becomes an MAP, a 6 month looks back applies to contributions made and any that would have not been allowed will put a ban on the firm for 2 years
*2 two year look back applies to contributions made before becoming a MA solicitor.
*Contributions made by spouses or household members of a MAP are not considered subject ti the rule unless directed by the MAP
*If MAP made a 250 contribution to a candidate who lost the election the MAP could give more money without triggering a ban
*Check drawn on a joint account signed by two parties the contribution is split so would be 500 total 250 coming from each person would be ok.
*Donation of time is not considered a contribution if the volunteered time is during non-work hours
*G-37 is not violated if MAP’s makes contributions to other candidates for federal office, only those associate with municipal issuers.
*Charitable dono made by MAP on behalf of a municipal issuer do not violate the rule
*Attendance fee event sponsored by an firm features an issuer official as a speaker the money raised through the fees could trigger a ban
*If the official participates in both a primary and general election a contribution of up to 250 is allowed during each election if the MAP is entitled to vote
*If the MAP makes a contribution of 250 to the election of a municipal official and then contributes additional money toward an inauguration or transition event
*If a firm is both a broker-dealer and municipal advisor, a contribution in excess of the allowable de minimis amount of $250 triggers a 2-year ban on advisory business and negotiated underwriting business. Competitive underwriting business is not impacted because it is not relationship driven.
*If the firm is both a dealer and a municipal advisor a prohibited contribution from one line of business may trigger a ban on business for the other line
*Called a Cross Ban
*Ex - if a contribution is made to a municipal entity official that can influence the selection of both municipal deals and advisors by a person associated with only one line of business within the dealer-municipal advisor a ban could apply not only to municipal securities business but also to Municipal advisory business.
Advertising Rules
*Advertising includes
*Any material that is published or used in any electronic or other public media
*Any written or electronical promotional literature that is distributed or made generally available to municipal entities, obligated persons, MA clients or the public
*Form letters to more than 25 person within any period of 90 consecutive days. Letters distributed to 25 or fewer persons in 90-day period are correspondence
*All advertising by MA’s
*Must be fair and in good faith
*Provide fair & balanced treatment of risks and potential benefits
*Cannot be untrue or misleading
*Cannot omit material facts
*Can include legends and footnotes
*Must be appropriate for the intended audience
*May not predict or project performance, hypothetical or the use of investment analysis tools are permitted
*Static Content
*Which changes infrequently includes website copy, information, posted on Facebook wall or profile, blogs
*Must be approved by a principal prior to use.
*Interactive content
*Is a real time communication, including tweets, chats, Facebook comments, or responses to comments on a blog post.
*Does not require prior principal review but it is subject to supervision and spot checks.
Rule G-14 - Reports of Sales or Purchases
*Requires all sales of municipal securities to be reported to the MSRB’s real-time transaction reporting systems.
*Transactions effected during the hours of the RTRS business days (7:30-6:30pm) must be reported within 15 minutes of the time of trade
*Transactions outside the RTRS business hours must be reported no later than 15 mins after the beginning of the next RTRS business day.
Arbitration
*Method of settling monetary disputes between MA firms
*Disputes involving a customer only go to arbitration with the customers written consent otherwise it goes to court
*Usually a more efficient settlement process because there is no appeals process
*All arbitration settlements are final and binding and any monetary awards must be paid within 30 days of the decision.
-The MSRB requires that municipal advisors pay an annual fee of $1,160 for each registered municipal advisor representative for which it has an MA-I on file with the SEC as of January 31st of that year.
The fee is due by April 30th, and a late fee of $25 per registered person applies if the deadline is missed.
Entertainment expenses are not reimbursable from the proceeds of a new securities offering.
1.6 SUPERVISORY AND COMPLIANCE OBLIGATIONS
The Supervisory System
Must include
*Designation of a CCO (chief compliance officer) - to oversee and perform compliance functions.
*May be either an employee or non-employee of the Municipal advisor
Written Supervisory Procedures
*Are designed to ensure compliance with applicable laws and regulations
*Must be updated as necessary
*Copy of the written procedures is to be made available in each office
*Designation of one or more municipal advisor principals to be responsible for supervision
*Designated supervisory principals must be qualified with series 54
*Implementation of processes - to maintain, review, test, and modify written compliance policies and procedures.
*Review of these policies and procedures is required at least annually and potentially more frequently depending on circumstance.
*Annual Written Certification - must certify annually in writing that the MA has in place reasonable processes to establish maintain review test and modify written compliance procedures.
*A MA that is a bank or separately identifiable department or division of a bank is exempt from the supervisory requirement
MSRB Books and Records Requirements
If firms are compliant with the recordkeeping rules of the SEC then they are considered compliant with MSRB rules
MSRB requires that MA prepare and maintain the following
*Records of firm supervision and compliance processes
*Designation of MA principals and their responsibilities
*Content of each annual compliance interview
*Results of the annual review
*Detailed correspondence records
*Records of all gifts and gratuities
*Record of all political contributions
*Employment and compensations
*All non cash compensation
All Municipal Advisors must keep records of
*Written supervisory procedures
*Designation of a person as cco
*Designation of a person responsible for supervision
*Written compliance policies
*Annual certification of the compliance process
*Reviews of compliance policies and supervisory procedures
For banks with MA activities
*At least one officer of the bank must be designated by the board of directors as responsible for the day to day activities and supervision of this unit
*All records of the MA business unit must be kept separate from those of the bank.
Banks are exempt from MSRB supervisory and books and recordkeeping requirements if they certify each year that they are subject to similar regulations of banking regulators. While the MSRB requires most records to be kept for 5 years, the exception is the 6-years CCO record.
*Records must be preserved for at least 5 years
*Record of designation of persons responsible for supervision and cco must be preserved for the period of designation and for at least 6 years following any changes in the designation
*Records relating to customer complaints and political contributions must also be maintained for at least 6 years.
*Partnership articles, amendments, articles of incorporation, charters, minute books, and stock certificate books of the MA must be kept at least 3 years after termination
*MSRB requires all books and records be maintained in a easily accessible place for the first 2 years.
KEY CONCEPTS - CHAPTER 1 SEC AND MSRB RULES REGARDING MUNICIPAL ADVISORS
- Records of supervisory employees, including compliance officers, must be kept for 6 years from the employee termination dates.
- A Lucite tombstone given to an issuer by an MA in commemoration of a business transaction is not considered a gift if it is not excessive.
- If a municipal advisor replaces a client’s non-functioning phone charger, the MA has given a gift that must be counted toward the annual gift limit.
- An MA would violate the duty of loyalty by not considering alternatives in making a recommendation to a client.
Like most records required of municipal advisors, records of gifts and gratuities must be preserved for 5 years. Records of political contributions are unique from other requirements and must be kept for 6 years.
