Regulations -MSRB Rules
A Municipal Finance Professional (MFP) writes a check from an account that is held jointly with his non-working wife for $500 to an elected official's campaign in which he is entitled to vote. He provides his employing municipal securities firm with a letter stating that 50% of the contribution was for himself and the other $250 was for his wife. Will this result in a 2-year ban prohibiting the municipal securities firm from transacting municipal securities business with that issuer? A. Yes, because the entire $500 contribution is attributable to the MFP under MSRB rules B. No, because only $250 of the contribution is attributable to the MFP under MSRB rules C. Yes, because a contribution of any dollar amount to an elected official's campaign triggers a ban under MSRB rules D. No, because a ban is only triggered when a non-MFP makes a contribution in excess of the de minimis amount
The best answer is A. 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. "If a municipal finance professional signs a check, whether the check was drawn on a joint account or not, and submits it as a contribution to an issuer official, then the municipal finance professional is deemed to have made the full contribution, regardless of any writing accompanying the check that provides or directs otherwise." Thus, all $500 is attributable to the MFP and this would result in a ban.
Which statements are TRUE? I SHORT information is found within EMMA II EMMA information is found within SHORT III RTRS information is found within EMMA IV EMMA information is found within RTRS A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. EMMA stands for 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).
All of the following are considered to be MFPs EXCEPT a representative who: A. sells municipal securities to retail customers B. provides advice to an issuer regarding an offering of municipal securities C. provides investment advice regarding municipal securities to institutional clients D. is involved in soliciting municipal securities business
The best answer is A. An MFP (Municipal Finance Professional) is any associated person engaged in municipal securities representative activities EXCEPT the sale of municipal securities to "natural" persons - meaning human beings. Municipal securities representative activities include: the underwriting or sales of municipal securities; the solicitation of municipal securities business; financial advisory or consultant services to municipal issuers; research of investment advice regarding municipal securities; and communication with public investors about municipal securities. In addition, any principal that supervises these persons are defined as MFPs. It is important to note that since sales activities with "natural persons" are not considered to be MFP activities, retail representatives are excluded from the definition and do not fall under the political contribution rules.
Under MSRB rules, which of the following are prohibited? I Guaranteeing a customer account against loss II Recommending the purchase of a put option to the customer as protection against loss III Agreeing to repurchase bonds from a customer personally at a preset price IV Recommending the use of a repurchase agreement to the customer as a means of protecting against loss A. I and III B. II and IV C. I, II, III D. All of the above
The best answer is A. It is prohibited to agree to repurchase bonds from a customer personally at a preset price since this is a guarantee against loss to the customer that is prohibited. Guaranteeing a customer's account against loss is prohibited. Recommending the use of put options or repurchase agreements to protect against loss are both valid strategies and are permitted under MSRB rules.
A registered representative has written discretionary authorization from a customer. Specific customer approval is needed for the registered representative to effect which of the following transactions in the customer's account? I Sell naked calls II Sell covered calls III Purchase a municipal bond where the broker-dealer has a control relationship with the issuer A. III only B. I and II C. II and III D. I, II, III
The best answer is A. Under MSRB rules, if a control relationship exists between a brokerage firm and the security being recommended, this security cannot be purchased in discretionary accounts unless the specific authorization of the customer is obtained first. The issue here is that there can be an inherent conflict of interest when such a relationship exists. For example, a municipal control relationship might exist if the president of the broker-dealer is also a political official of the town whose bonds are being recommended. Such a broker-dealer, if it were unscrupulous, would have an incentive to "support" the price of the issue in the aftermarket, making it more likely that the municipality would use that firm for future underwritings. It could do this by making purchases of that issue in its discretionary accounts. No specific authorization is required to sell naked or covered calls in discretionary accounts. The only requirement is that discretionary trades executed be consistent with the customer's investment objective; must not be too frequent; and must not be excessively large in size.
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.
Under MSRB rules, which of the following statements are TRUE regarding a broker-dealer recommending municipal securities? I The broker-dealer must have reasonable grounds for making any recommendation II The broker-dealer does not need reasonable grounds for making recommendations III If the customer refuses to disclose significant financial information, no recommendation can be made IV If the customer refuses to disclose significant financial information, recommendations can still be made A. I and III B. I and IV C. II and III D. II and IV
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 recommendation 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!
A municipal dealer places an order for $100,000 of new issue G.O. bonds, M '35 with the syndicate manager. The bonds will be placed in an "accumulation account" for a unit investment trust being established by the syndicate member. Which statement(s) is (are) TRUE? I The syndicate member must disclose to the manager that the bonds are being purchased for an accumulation account II The manager will disclose the order to the other syndicate members when the syndicate account is closed III The order will be treated as a "syndicate" order by the manager A. I only B. I and II C. II and III D. I, II, III
The best answer is B. An order placed with the syndicate by a member for an "accumulation account" being managed by that member is unusual in that the bonds are not being sold to the general public. They really are being retained by a syndicate member for his own use. The syndicate member must disclose this to the manager when the order is placed; the manager will disclose any of these orders that have been filled to the other syndicate members when the account is closed; and the manager will fill these orders last- meaning they get priority after pre-sale, group (syndicate), and designated orders. They are treated as member takedown orders, and if there is sufficient interest in the issue, would not be filled because of the other orders with higher priority.
Upon customer request, a dealer in a competitive municipal syndicate must disclose: A. the spread taken by the underwriters B. order priority provisions C. names of syndicate members D. name(s) of the person(s) from whom orders have already been received
The best answer is B. MSRB rules require that if a customer requests, the dealer must disclose the order priority provisions on a new issue (the usual priority is Pre-Sale; Group Net; Designated; Member Takedown). There is no requirement to disclose to a customer the underwriter's spread in a competitive bid issue (that is true for negotiated issues only). There is no required spread disclosure for competitive bid issues because the spread is very thin on such offerings. The names of the syndicate members do not have to be disclosed to customers (though this information is readily available), nor the names of persons from whom orders are received. The MSRB does require that syndicate members disclose the identity of the person for whom an order is placed, to the managing underwriter.
Under MSRB rules, municipal securities traders that participate in secondary market joint accounts: A. can only act as agent in the transactions and cannot carry positions overnight B. cannot disseminate quotes severally for the securities held by the account; any quote can only indicate that one market exists C. cannot place orders to buy bonds for an accumulation account sponsored by a dealer participating in the joint account D. cannot effect customer transactions and can only deal with other municipal broker-dealers
The best answer is B. Municipal secondary market joint accounts are formed by municipal firms to purchase or sell large blocks of bonds in the trading market. Any quotes disseminated on those bonds must appear as one quote; it cannot appear that there are multiple markets for the bonds when in fact there is only one (the joint account).
The MSRB regulates all of the following EXCEPT: A. municipal brokers B. municipal bond counsels C. municipal dealers D. municipal bank dealers
The best answer is B. The MSRB has no authority over municipal bond attorneys, nor municipal issuers. It regulates municipal brokers and dealers, including bank dealers in the municipal market.
Enforcement of regulations regarding trading of municipal securities, as they apply to firms that are members of FINRA, is performed by (the): A. NYSE B. FINRA C. MSRB D. FDIC
The best answer is B. The MSRB has no enforcement capability - it creates rules, leaving enforcement to the existing regulatory bodies. Since municipal bond trades are effected "over-the-counter," again, FINRA acts as the enforcement agent for broker-dealers. The NYSE itself only regulates its own trading floor.
Under the Securities Acts of 1975, the Municipal Securities Rulemaking Board was created and empowered to regulate the: I disclosure of new information by municipal issuers II recordkeeping and settlement procedures of municipal broker-dealers III profit levels achieved by municipal broker-dealers A. I only B. II only C. II and III D. I, II, III
The best answer is B. The MSRB is empowered to regulate municipal market participants - municipal brokers, dealers, and banks that deal in municipal bonds. The MSRB has no power to regulate municipal issuers, making Choice I false. The MSRB does not regulate profit levels, making Choice III false.
If the Mayor of Little Rock, Arkansas is also a director of a Little Rock municipal securities dealer, which of the following statements are TRUE regarding the municipal securities dealer recommending the purchase of Little Rock G.O. bonds? I A control relationship exists II A control relationship does not exist III Recommendation of the securities is prohibited IV Recommendation of the securities must be accompanied by a disclosure of the nature of the relationship A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. The MSRB requires that if a control relationship exists between a municipal securities dealer and the issuer whose bonds are recommended by that dealer, the nature of the relationship must be disclosed to the customer. Here, the Mayor of Little Rock is a director of a Little Rock broker-dealer and a control relationship exists. If the dealer recommends the purchase of Little Rock bonds, the nature of the control relationship must be disclosed to the customer.
A preliminary Official Statement must be delivered to a customer if: A. the customer requests it in writing B. the final official statement is not ready at the time of settlement C. this is the customer's first purchase of bonds of that issuer D. the trade confirmation is not yet ready
The best answer is B. Under MSRB rules, if a Final Official Statement is being prepared but is not yet ready, at the time of settlement, the customer can be sent a typed summary or a Preliminary Official Statement copy.
All of the following statements are true regarding negotiated municipal underwritings EXCEPT the: A. initial offering price of each maturity must be disclosed B. spread must be disclosed C. participation amount of each underwriter must be disclosed D. customer must be sent a copy of the Official Statement, if available
The best answer is C. In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters nor their participation amounts. For all municipal new issues, if the Official Statement is prepared, it must be given to customers no later than settlement.
MSRB rules allow which of the following when selling a new issue of municipal bonds? I Providing a customer with a Preliminary Official Statement if the Final Official Statement is not yet available at settlement II Disclosing order priority provisions upon the request of customers III Orally agreeing to repurchase the bonds at an agreed price IV Not disclosing the spread on reofferings of competitively bid issues A. I and II only B. II and III only C. I, II, IV D. I, II, III, IV
The best answer is C. MSRB rules on new issue disclosure allow a Preliminary Official Statement to be sent at settlement if a Final Official Statement is not yet prepared; require that order priority provisions be disclosed at customer request; and require that the spread be disclosed on "negotiated" offerings. There is no spread disclosure on competitive bid offerings. Oral agreements to repurchase securities at a fixed price are prohibited - any repurchase agreement must be detailed in writing.
Under MSRB rules, advertising relating to municipal securities must be approved by the: I Municipal Securities Principal II General Securities Principal III Financial and Operations Principal A. I only B. II only C. I or II D. I or II or III
The best answer is C. Municipal advertising can be approved by either a General Securities Principal or a Municipal Securities Principal. The Financial and Operations Principal prepares or approves the financial reports that brokerage firms submit to the SEC.
Under MSRB rules, a registered representative can perform which of the following functions? I Trading municipal issues in the secondary market II Offering call and put options on municipal securities to customers III Overseeing the activities of other municipal registered representatives IV Offering new municipal issues to retail customers A. I and II only B. III and IV only C. I, II, and IV D. I, II, III, IV
The best answer is C. Municipal representatives are permitted to trade municipal issues in the secondary market; offer call and put options on municipal issues; and sell new municipal issues to customers. Registered representatives are not permitted to supervise other representatives. To do so, the individual must pass the principal's exam.
Under MSRB rules, municipal firms are allowed to enter into which of the following transactions with an investment company? I Accepting portfolio trades for the investment company as compensation for sales of the investment company's securities II Buying the securities issued by an investment company to fill existing customer orders III Acting as a broker's broker for a large block of bonds that the investment company wishes to sell IV Accepting a pre-sale order from an investment company for a new municipal issue A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
The best answer is C. The "anti-reciprocal" rule prohibits mutual funds from compensating brokerage firms for their sales of mutual fund shares by sending their portfolio trades through that firm. The choice of a firm to handle portfolio trades should be based on price and performance - not sales of the mutual fund's securities by that brokerage firm. Accepting pre-sale orders for new issues from an investment company is allowed; acting as a broker's broker for a large trade is allowed; and placing orders with mutual fund companies to fill customer orders for fund shares is allowed.
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 municipal dealer is reoffering 7% bonds which he just purchased at par. All of the following quotes would be considered "fair and reasonable" EXCEPT: A. 6.90 less 1/2 B. 100 1/2 C. 108 D. 6.75 net
The best answer is C. 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 6.75%, the dealer is reducing the yield by .25 from the stated 7.00 yield. .25/7.00 = 3.6% reduction in yield, which approximates the percentage mark-up. The quote of 6.90 less 1/2, means the dealer is pricing the bond to yield 6.90% and is then deducting 1/2 point from the price. This bond will be priced at a slight premium less 1/2 point. Of all the quotes, it appears that 108 is by far the most expensive.
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 Official Statement is: I required by the Securities Act of 1933 for all new issue municipal bonds II required to be delivered at or prior to settlement, if available III required by the MSRB for all new issue municipal bond offerings exceeding $5,000,000 IV requested by underwriters to satisfy SEC due diligence requirements and the disclosure requirements of new issue purchasers A. I and II B. II and III C. II and IV D. I, II, III, IV
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 one is available, it must be given to purchasers at or prior to settlement of sale.
A registered representative has a wealthy client who has placed $1 million under management with the representative. The client has recently been elected to his town's Board of Estimate and Taxation, and the municipal securities firm that employs the representative has done underwritings in the past for the town. The representative wishes to take the client out to dinner, which is expected to cost $250. Which statement is TRUE about doing this? A. Taking this individual to dinner violates the MSRB $100 gift limit B. Taking this individual to dinner is permitted because it has a de minimis value under the MSRB Political Contribution rule C. Taking this individual to dinner is permitted because this is business entertainment D. This individual cannot be taken to dinner because it is a conflict of interest
The best answer is C. This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario! The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official's campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution - rather, it is taking a client to dinner. The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm's policies and procedures.
When advertising the availability of a municipal security at a "yield," a municipal firm: I must own the security II does not have to own the security III must disclose whether the yield is the coupon rate or yield to maturity IV must disclose whether the yield is the coupon rate or current yield A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Under MSRB rules, a municipal firm is permitted to offer a security that it does not own as long as the firm is prepared to sell that security at the quoted price (the MSRB states that the dealer must know that the bond can be acquired - this is the equivalent of a car dealer selling you a new car that the dealer does not have on the lot. As long as the car dealer knows where the car can be purchased, say from another dealer, then it can be sold to you). Any yield quoted must state whether the yield is the coupon rate, yield to maturity, or yield to call date. Current yield is thought by the MSRB to be somewhat misleading and may not be shown unless the yield to maturity is also shown.
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 bonds in inventory 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 (as a contrast, FINRA requires that a minimum of 3 quotes be obtained for non-NASDAQ OTC issues, meaning OTCBB or Pink Sheet issues), nor is there a requirement to direct the customer to a dealer that physically has those bonds.
Municipal bond dealers engage in all of the following activities EXCEPT: A. distributing bona-fide quotes to interested parties B. participating in syndicates bidding on new issues C. acting as a market maker by taking long positions D. acting as a market maker by taking short positions
The best answer is D. Municipal dealers participate in bidding for new issues, distribute quotes, and take inventory positions (long positions) in municipal issues. Short positions are not taken due to the thin trading market for municipals which makes short covering difficult.
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.
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, all of the following are prohibited activities EXCEPT: A. agreeing to repurchase bonds from a customer personally at a preset price B. sharing in the gain or loss in a customer's account that is not proportionate to the amount of capital contributed C. guaranteeing a customer account against loss D. recommending the purchase of a put option to the customer as protection against loss
The best answer is D. It is prohibited to agree to repurchase bonds from a customer personally at a preset price since this is a guarantee against loss to the customer that is prohibited. Sharing in the gain or loss of a customer's account is prohibited unless the principal approves and the sharing is proportionate to the capital amount contributed. Guaranteeing a customer's account against loss is prohibited. Recommending the use of put options or repurchase agreements to protect against loss are both valid strategies and are permitted under MSRB rules.
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).
A Municipal Finance Professional contributes $150 to the re-election campaign of an incumbent municipal official that is the MFP's neighbor. The incumbent loses the election and is now out of office. In order to extinguish the campaign debt, the former issuer official solicits prior contributors, including the MFP. Under MSRB Rule G-37, the MFP may contribute: A. 0 B. $100 C. $250 D. an unlimited amount
The best answer is D. The MSRB's stance in this situation is that the elected official is now out of office and has no ability to steer municipal securities business to the MFP's firm in return for a large campaign contribution. Because he or she is out of office, the MFP can contribute any dollar amount to the "clean-up" campaign. It makes no difference that the MFP made a political contribution to this official's failed campaign.
A registered representative receives a written complaint from a customer regarding a purchase of G.O. bonds. The registered representative should: A. send a copy of the complaint to the MSRB B. send a copy of the complaint to the SEC C. submit the complaint for arbitration D. attempt to resolve the complaint with the approval of the municipal principal
The best answer is D. Written customer complaints should be resolved. The MSRB requires that every customer complaint be given to the principal for review and resolution.
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.
