Unit 2-Securities Laws and Regulations

Question 1

Securities Act of 1933

Answer 1

Designed to protect investors in the purchase of new issues:
-All non-exempt issues must be registered
-Issuer must provide full disclosure of material info
-Mandates regulations for secondary market (act 1934)
-Lays out criminal provisions related to new issue fraud
NOTE: Munis are exempt from the Act, but all BDs and Dealers are subject to the anti-fraud provision of the Act

Question 2

Securities Exchange Act of 1934

Answer 2

Designed to curb fraud and manipulation in secondary market
-Establishes SEC
-Requires registration of BDs, SROs, and Exchanges (and their reps/advisors)
-Requires regular financial disclosures from public issues
-Addresses insider trading, fraud, manipulation
-Creates rules for market makers and underwriters
NOTE: Munis are exempt from the Act, but all BDs and Dealers are subject to the anti-fraud provision of the Act

Question 3

Municipal Securities Disclosure (SEC 15c2-12)

Answer 3

While munis are exempt from most provisions of the Acts of ‘33 and ‘34, the SEC does influence the underwriting process as the underwriter must be registered and–by underwriting a muni issue, is providing an implied recommendation.
Essentially, the SEC cannot force a municipality to make any disclosures outright. However, once that muni decided to trade in the open market governed by the SEC, the SEC can force regular disclosures of material information from munis in order to maintain a fair marketplace

Question 4

Underwriter Responsibility: The OS

Answer 4

Since underwriting involves an implied recommendation, all IB must review an issuer’s OS on any offering of $1 million+ before engaging to underwrite, sell, buy
NOTE: While there are some exceptions, almost all muni offerings have an OS these days

Question 5

Investment Company Act of 1940

Answer 5

Defines and regulates investment companies (including mutual funds)
-Mandates all investment companies register with SEC
-Clearly state investment objective in OS or prospectus
-Comply with pricing standards, public sales, and reporting
NOTE: Municipal Fund Securities are excluded from the Act of 1940

Question 6

MSRB Board

Answer 6

Tasked with market regulation, rule making, regulatory support, and qualification of market professions to prevent fraud an promote just and equitable practices
-Empowered by Congress and subject to the SEC to enact and interpret rules relating to the underwriting of municipal issues
NOTE: Remember, the MSRB has not authority over the municipality itself

Question 7

MSRB Fees

Answer 7

Self-supported through annual dues and technology fees

• Every muni BD or IA pays $1000 initial registration fee
• An annual $1000 fee is due by Oct 31 each year

Question 8

MSRB Underwriting Assessment

Answer 8

Each BD must pay the MSRB $.0275/$1000 of par for all municipal securities purchased from an issuer by or through the firm as part of a primary offering
-Commercial Paper and Muni Fund Securities excluded

Question 9

MSRB Transaction Assessment

Answer 9

Each BD must pay $.01/$1000 of municipal transactions to the MSRB
-Excludes CP, Municipal Fund Securities, and issues that mature in 9 months or less

Question 10

MSRB Technology Fee

Answer 10

Each BD must pay MSRB $1 for each inter-dealer transaction reported
-All invoices sent by the MSRB to member firms must be paid within 30 days

Question 11

Notifying the MSRB of changes

Answer 11

The MSRB must promptly be notified if a BD:

• Ceases muni securities or advisory activities
• If it has been expelled or suspended from an exchange or other SRO
• Any other major changes like firm name or address

Question 12

The MSRB has not enforcement power. Who does?

Answer 12

BDs: FINRA and the SEC
Natl. Banks: Comptroller of Currency
Non-natl banks in Fed: Federal Reserve Board
Non-natl banks not in FED: FDIC

Question 13

Who Conducts Audits?

Answer 13

Muni Firms: FINRA
Fed Reserve Banks: FRB
Natl. Banks: Coptroller of Currency
State and local banks: FDIC

Question 14

SIPC Membership

Answer 14

All BDs are required to be members except:

• Banks dealing exclusively with muni securities
• Firms dealing exclusively in U.S. govt. Securities
• Firms that deal exclusively with redeemable investment company securities

Question 15

SIPC Customer Coverage

Answer 15

$500K per separate customer (up to $250K in cash)
-All executor accounts (for a dead person) count as one
-Corp and Partnership accounts are separate from the accounts of its directors/partners
-Trust accounts are their own customer
-All joint accounts with the same tenants are one
NOTE: Futures and Currencies not covered as they are not securities
-The SIPC can borrow up to $1 billion from SEC to cover claims

Question 16

Disallowed Claims on SIPC

Answer 16

• Claims of officers and partners
• Claims from other member firms prop accounts
• Claims of subordinated lenders
• Claims of anyone who owns 5%+ in equity in the firm

Question 17

Municipal Advisor Fee and Form MA-I

Answer 17

• $300 annually
• Filed with form MA-I by April 30th each year
• Late fees will be assessed and may result in suspension or revocation if not addressed timely