s ch2 continued

Question 1

taping

Answer 1

five, but fewer than 10 registered representatives, where 40%
at least 10, but fewer than 20 registered four or more have been disciplined
Employs at least 20 registered representatives, where 20% or more have been disciplined firms within the last three year

Question 2

Market Discount Rule

Answer 2

If a municipal bond is purchased at a discount in the secondary market (a
discount caused by market conditions) and held to maturity, there will be a taxable gain at maturity.
However, the gain is reported as ordinary income.
f the bond is sold at a gain prior to maturity, the investor may be required to pay a combination of
ordinary income and capital gains taxes, depending on how much of the gain is due to the initial discount
(taxed at ordinary income tax rates) and how much is due to changing market conditions (taxed at the
capital gains rate). Like many tax regulations, this rule can be highly complex.

Question 3

Original Issue Discount Bonds

Answer 3

A bond that’s initially issued at a discount is classified as an original
issue discount (OID). The appreciation in value (the amount of discount) is treated differently than a
secondary market discount. The difference in treatment is due to the fact that the appreciation of the OID
is actually based on interest and not a capital gain. A zero-coupon bond is considered an OID and the
discount is treated in the same manner.

Question 4

Records Concerning Compliance with Gifts and Gratuities

Answer 4

6 years
 A separate record of any gift or gratuity defined under the gift rule (There’s no exception on the dollar
value of the gift and it’s a violation if the gift exceeds $100.)
 A record of all agreements relating to compensation for services provided to the municipal securities
dealer
 A record of certain information relating to all non-cash compensation such as the name of the person
or entity making the gift, the names of the associated persons receiving the payment, the location of
the meeting that was used to educate the representatives concerning the securities product, and the
value of non-cash compensation received

Question 5

A form letter is

Answer 5

considered advertising and is defined as any written or electronic mail message that’s
distributed to more than 25 persons within any 90-day period. Therefore, an electronic message that’s sent
to 25 persons is defined as correspondence, but if it’s sent to 26 or more persons, it’s considered
advertising.

Question 6

If an advertisement contains a testimonial about the investment advice or investment performance of a
broker, dealer, or municipal securities dealer or its products, that advertisement must prominently
disclose the following:

Answer 6

− The fact that the testimonial may not be representative of the experience of other customers.
− The fact that the testimonial isn’t a guarantee of future performance or success.
− If more than $100 in value is paid for the testimonial, the fact that it’s a paid testimonial.

Question 7

Product Advertisements

Answer 7

The MSRB considers advertisements that disclose only a current yield to be misleading. The Board
believes that yield-to-maturity or yield-to-call is the most important information in determining whether a
price is fair and reasonable
Also, product advertisements must indicate that net (after-tax) yields might be less. The price or
approximate price or the fact that the bond is trading at a premium must be indicated. If this is not
indicated, the ad is considered unacceptable.

Question 8

Interactive Content

Answer 8

The term interactive content refers to content that’s posted or disseminated for
direct, real-time interaction (e.g., chatting or messaging). Interactive content that’s considered advertising
and posted or disseminated in an interactive electronic forum is exempt from the requirement that it be
preapproved in writing by a Municipal Securities Principal or General Securities Principal. Any posting
that’s made to an interactive social networking site (described in detail below), which may be defined as
advertising, is supervised in a manner that’s similar to correspondence (i.e., it must be reviewed and
supervised, but not preapproved).

Question 9

Static Content

Answer 9

Static content is material that’s posted to social media for an extended period and is not
interactive. If interactive content is copied or forwarded to a static area of a social media site, it’s now
considered advertising and must be approved by a principal

Question 10

Social Media and MSRB Rule G-21

Answer 10

The MSRB considers a firm’s use of social media sites (e.g., LinkedIn, Facebook, and Twitter) as
advertising, unless an exception applies. For that reason, the content standards and rules regarding
principal preapproval apply. In addition, the municipal firm must comply with all of the other applicable
MSRB rules (G-17, G-8 and G-9), as well as SEC recordkeeping rules. Although the use of a social
networking site is subject to preapproval, posts by employees are considered interactive content and
therefore only subject to review and supervision, but not approval.

Question 11

Hyperlinks

Answer 11

A municipal broker-dealer is permitted to include a hyperlink on its website to an
independent third-party’s content. In this case, the content is considered to be advertising by the brokerdealer if the broker-dealer was either involved in the preparation of the content (entangled) or implicitly or
explicitly approved or endorsed the content (adopted)

Question 12

Third-Party Post

Answer 12

Posts by customers, municipal entity clients, or any other third party are referred to as
third-party posts. These third-party posts that appear on either the municipal advisor’s or its employees’
social networking pages or sites are not considered advertising unless the municipal firm becomes
entangled or has adopted the third-party content. Examples include the broker-dealer or its employees
paying or soliciting the third-party posts or sharing (“liking”) the third-party posts

Question 13

paying to post positive comments on social media

Answer 13

An example of entanglement is when the municipal firm or Municipal Securities Representative pays for or solicits a third-party to post certain comments on a social networking page. In this question, since the posting is considered advertising, the positive comments are considered a testimonial which is prohibited under the MSRB’s advertising rules

Question 14

customer account record retention

Answer 14

6 years

Question 15

correspondence retention

Answer 15

Correspondence that’s prepared by associated persons must be retained for a minimum of four years and
must include the name of the supervisory personnel who reviewed the information. Many firms use
electronic systems to conduct a pre-use review of all incoming and outgoing correspondence

Question 16

National Do Not Call List

exemptions

Answer 16

The firm has obtained the individual’s expressed prior, written consent, which is evidenced by a
signed, written agreement. The agreement must state that the individual agrees to be contacted and the
telephone number to which calls may be made.
 There’s an established business relationship between the RR and the individual.
 There’s a personal relationship between the individual and the RR

Question 17

Suitability

Answer 17

Age
 Other investments
 Financial situation and needs
 Tax status
 Investment objectives and experience
 Investment time horizon
 Liquidity needs
 Risk tolerance
 Any other information obtained from the customer

Question 18

Capital Appreciation Bonds (CAB)

Answer 18

Another type of zero-coupon municipal bond is referred to as a
capital appreciation bond (CAB). CABs differ from traditional zeros in that the difference between the amount
paid and the amount received at maturity is considered compounded interest and not accreted OID interest

Question 19

Lease Rental Bonds

Answer 19

These revenue bonds involve one municipal entity leasing a facility from another.
For example, a state building authority might issue bonds to build a college dormitory and then lease the
dorm to the college. The bond issued by the building authority will be paid from revenues through lease
payments that are received from the college

Question 20

A private activity bond

Answer 20

is a type of municipal bond where the funds
raised will primarily benefit a non-public or private company (e.g., an airport terminal for an airline). The
interest from these bonds is only taxable at the federal level if the person receiving the interest is subject to
the alternative minimum tax (AMT).

Question 21

Investment Seminars

Answer 21

If a broker-dealer is holding an investment seminar, it should not assume that all
attendees would benefit from tax-free income. In addition, if a specific security is recommended during the
seminar the firm must have reasonable grounds to believe that the recommendation is suitable based on the
customer’s financial status, tax status, investment objectives and any other information the dealer deems
necessary.

Question 22

Protesting a Transfer

Answer 22

1. It has no record of the account on its books
2. The transfer instructions are incomplete, or
3. The transfer instructions contain an improper signature
4. Additional documentation is required (e.g., death certificate)
5. The account is flat and reflects no transferable assets
6. The account title doesn’t match the firm’s records
7. The customer has submitted written instructions to rescind the transfer

Question 23

Taxpayer ID Exception

Answer 23

A broker-dealer that receives an application to open an account may forgo
obtaining a taxpayer ID number if that person has applied for, but not yet received the number. However,
in lieu of the number, the broker-dealer must retain a copy of the person’s application for the number.

Question 24

Individuals on Governmental Lists

Answer 24

Firms and their representatives must make certain that they are not
doing business with any person whose name appears on the list that’s maintained by the Treasury Department
Office of Foreign Assets Control (OFAC), referred to as the OFAC List or List of Specially Designated
Nationals (SDNs). This is a list of known and suspected terrorists and other criminals, as well as pariah
nations. D

Question 25

The penalties for violating the AML

Answer 25

20 years in prison, in addition to fines of $500,000 per transaction or twice
the amount of the funds involved, whichever is greater.

Question 26

written customer complaints records

Answer 26

kept for six years
 The complainant’s name, address, and account number
 The date on which the complaint was received
 The date of the activity that gave rise to the complaint
 The name of each associated person of the firm who is identified in the complaint
 A description of the nature of the complaint and what action, if any, has been taken

Question 27

Complaints that need forwarded to SRO

Answer 27

Firms must promptly report certain written customer complaints to other appropriate regulatory authorities
if the complaint alleges theft or misappropriation of funds and/or securities or forgery.

Question 28

Investor and Municipal Advisory Client Education and Protection (G-10)

Answer 28

Once every calendar year, municipal securities firms are required to provide each customer with the
following information in either written or electronic form:
 A statement that it’s registered with the SEC and the Municipal Securities Rulemaking Board
 The website address for the Municipal Securities Rulemaking Board, and
 A statement as to the availability of an Investor Brochure for customers that’s posted on the website of
the Municipal Securities Rulemaking Board which describes the protections afforded by MSRB rules
as well as how to file a complaint with an appropriate regulatory authority

Question 29

Arbitration (Rule G-35)

Answer 29

If two parties have a
disagreement regarding a transaction in municipal securities, they can submit the
disagreement to an impartial panel to resolve the dispute.
Circumstance 1: Firm against firm
Circumstance 2: Customer against firm
Circumstance 3: Firm against customer
Six year time limit
Panel Decisions are Final and Binding

Question 30

Predispute Arbitration Agreements

Answer 30

In many cases, broker-dealers ask customers to enter into predispute arbitration agreements. This is
frequently done when opening a customer account. Any predispute arbitration clause must be highlighted
and preceded by the following disclosure language:
 Arbitration is final and binding on the parties.
 The parties are waiving their right to seek remedies in court, including the right to a jury trial.
 Prearbitration discovery is generally more limited than and different from court proceedings.
 The arbitrator’s award is not required to include factual findings or legal reasoning and any party’s
right to appeal or to seek modification of rulings by the arbitrators is strictly limited.
 The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with
the securities industry.
Immediately before the signature line there must be a highlighted statement which mentions the existence
of a predispute arbitration clause and its location in the agreement. A copy of the agreement must be given
to the customer.