MSRB Rules

Question 1

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

Answer 1

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.

Question 2

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

Answer 2

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.

Question 3

The MSRB regulates all of the following EXCEPT:

A. municipal brokers
B. municipal issuers
C. municipal dealers
D. municipal bank dealers

Answer 3

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.

Question 4

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

Answer 4

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.

Question 5

Enforcement of MSRB rules for bank dealers is performed by all of the following EXCEPT the:

A. Office of Comptroller of Currency
B. Municipal Securities Rulemaking Board
C. Federal Reserve Board
D. Federal Deposit Insurance Corporation

Answer 5

The best answer is B.

Enforcement of MSRB rules for bank dealers that are not registered as broker-dealers with FINRA is performed by the bank regulatory bodies - the Office of Comptroller of Currency; the Federal Reserve; and the Federal Deposit Insurance Corporation. Note that the MSRB writes rules for municipal market participants; but cannot enforce its own rules. It relies on the existing enforcement network for this.

Question 6

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

Answer 6

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.

Question 7

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

Answer 7

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).

Question 8

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

Answer 8

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.

Question 9

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

Answer 9

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.

Question 10

A registered representative works in the municipal finance department of a municipal securities firm in a large city and is defined as a Municipal Finance Professional (MFP). The firm recently completed a $100 million underwriting for the city and the firm is hosting a dinner to celebrate the closing of the deal. The event is expected to cost $300 per person, including the cost of a cocktail reception, dinner, and the cost transporting the group to and from the venue where the event is being held. The representative wishes to invite one of the town officials with whom he worked on the underwriting to the event. 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 a violation because the $300 value exceeds the MSRB Political Contribution rule limit
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

Answer 10

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.

Question 11

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

Answer 11

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.

Question 12

Under MSRB rules, a principal must review and approve:

I each municipal transaction
II each piece of customer correspondence relating to municipal transactions
III the handling of each customer complaint

A. I only
B. I and II
C. II and III
D. I, II, III

Answer 12

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.

Question 13

Under MSRB rules, inquiry should be made about which of the following in order to make suitable recommendations to customers?

I Investment objective
II Tax bracket
III Financial situation
IV State of residence

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 13

The best answer is D.

All of the choices are relevant when recommending municipal bonds - investment objective; tax bracket; financial situation; and state of residence (since municipal bonds purchased by state residents are exempt from taxation in that state; but are not exempt from taxation when purchased by non-residents).

Question 14

A municipal dealer is reoffering 7% bonds which he bought at par. Which of the following quotes would be considered “fair and reasonable”?

I 108
II 6.00
III 6.90
IV 100 1/2

A. I and II
B. III and IV
C. I and III
D. II and IV

Answer 14

The best answer is B.

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.

Question 15

Under MSRB rules, confirmation disclosure for bonds sold at par must include which of the following?

I Whether the securities are callable
II Capacity in which the broker-dealer acted
III Total dollar amount of the transaction
IV The yield at which the transaction was effected and the resulting dollar price

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 15

The best answer is C.

For municipal bonds that are traded at par, there is no requirement to show the yield at which the transaction was effected, because it will not differ from the stated rate of interest since the bonds were traded at par. All of the other items must be disclosed; 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.

Question 16

Under MSRB rules, confirmation disclosure for bonds sold at par must include all of the following EXCEPT:

A. whether the securities are callable
B. capacity in which the broker-dealer acted
C. total dollar amount of the transaction
D. the yield at which the transaction was effected and the resulting dollar price

Answer 16

The best answer is D.

For municipal bonds that are traded at par, there is no requirement to show the yield at which the transaction was effected, because it will not differ from the stated rate of interest since the bonds were traded at par. All of the other items must be disclosed; 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.

Question 17

Which of the following constitutes a municipal control relationship that must be disclosed to customers?

A. The President of the municipal broker/dealer is the Treasurer of the municipality whose bonds are being recommended
B. The municipal broker-dealer has its headquarters in the municipality whose bonds are being recommended
C. The municipal broker-dealer has won every competitive bid for the municipality’s securities over the past 3 years
D. The municipal broker-dealer always makes a market in the municipality’s securities that are being recommended

Answer 17

The best answer is A.

A control relationship exists when someone at a municipal firm is in a position of influence over the issuer of the securities. Choice A is clearly a control relationship - the President of the broker-dealer is also the Treasurer of the town whose securities are being recommended. Such relationships must be disclosed to customers. The other choices are not examples of control relationships, since there is no ability to influence the issuer in those situations.

Question 18

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, which statement is TRUE regarding disclosure of the relationship?

A. The relationship need not be disclosed to any purchaser of the bonds
B. The relationship must be disclosed to customers in writing no later than at confirmation of sale
C. The relationship must be disclosed only if the municipality agrees in writing to such disclosure
D. The relationship must be disclosed only if the broker-dealer is the sole underwriter on the issue

Answer 18

The best answer is B.

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. Control relationships must be disclosed in writing to customers who buy those bonds either at, or prior to, confirmation of sale.

Question 19

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

Answer 19

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.

Question 20

Under MSRB rules, which of the following are allowed?

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. None of the above

Answer 20

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. 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).

Question 21

Which of the following statements are TRUE regarding the requirements of the MSRB for handling written customer complaints?

I All customer complaints must be resolved
II If the customer alleges in a complaint that there has been a monetary loss, the MSRB must be notified
III The municipal principal must handle the resolution of each written customer complaint
IV The municipal principal must retain a file of all customer complaints with their resolution

A. I and III
B. II and IV
C. I, III, and IV
D. I, II, III, IV

Answer 21

The best answer is C.

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 enforce their rules. They would simply hand the complaint to FINRA, who enforces MSRB rules for broker-dealers.

Question 22

A municipal bond dealer typically engages in which of the following activities?

I Distributing bona-fide quotes to interested parties
II Participating in syndicates bidding on new issues
III Acting as a market maker by taking long positions
IV Acting as a market maker by taking short positions

A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 22

The best answer is C.

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.

Question 23

A municipal firm that is participating in a secondary market joint account can do all of the following EXCEPT?

A. effect a transaction for an accumulation account from the joint account
B. effect a transaction for a customer account from the joint account
C. disseminate a quote separately for the securities held by the account
D. effect a transaction for a related portfolio from the joint account

Answer 23

The best answer is C.

If a municipal firm is participating in a “joint account” to sell a block of bonds, only one quote is permitted for the account as a whole - there cannot be separate quotes. Thus, it cannot appear that there are multiple markets for this security when there really is only one - the secondary market joint account. Selling responsibility and liability are shared among account members in a similar fashion to an underwriting agreement. Any transaction can be effected out of the account - selling to an individual, another firm, a related portfolio, or an accumulation account.

Question 24

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

Answer 24

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.

Question 25

Under MSRB rules, which of the following may be changed by mutual consent between municipal dealers?

I Place of delivery
II Form of delivery
III Amount of accrued interest due
IV Time of delivery

A. I and II only
B. III and IV only
C. I, II, and IV
D. I, II, III, IV

Answer 25

The best answer is C.

The amount of accrued interest due is based on the settlement date of the transaction and cannot be changed. By mutual consent, municipal firms are free to change the place or time of a securities delivery; and can alter the form of the delivery - e.g., instead of book entry bonds being delivered, fully registered bonds might be delivered instead.

Question 26

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

Answer 26

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.

Question 27

To satisfy MSRB disclosure requirements for new municipal issues, a customer would be provided with a copy of the:

A. indenture
B. official notice of sale
C. feasibility study
D. official statement

Answer 27

The best answer is D.

The Official Statement is the disclosure document for new issue municipal bonds. If prepared by the issuer, it must be distributed to all purchasers by the underwriters at, or prior, to settlement.

Question 28

All of the following statements are true regarding the Official Statement EXCEPT that the Official Statement is:

A. not required by the Securities Act of 1933 because municipal issues are exempt securities
B. required to be delivered to all purchasers of a new municipal issue at or prior to settlement, if available
C. required to be prepared by issuers by the Municipal Securities Rulemaking Board for all new issue municipal bonds
D. requested by underwriters to satisfy the disclosure requirements of new issue purchasers

Answer 28

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 to be prepared by issuers by the MSRB, since the MSRB has no authority over municipal issuers. It is requested by underwriters to help sell the new issue and the MSRB states that if one is available, it must be given to purchasers at or prior to settlement of the transaction.

Question 29

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

Answer 29

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.

Question 30

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

Answer 30

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.

Question 31

Under MSRB rules, if a customer requests, the dealer:

I must disclose the order priority provisions on a new issue
II does not have to disclose the order priority provisions on a new issue
III must disclose the underwriter’s spread in a competitive bid new issue
IV does not have to disclose the underwriter’s spread in a competitive bid new issue

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 31

The best answer is B.

MSRB rules requires 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.

Question 32

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

Answer 32

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.

Question 33

Which of the following statements are TRUE regarding negotiated municipal underwritings?

I The spread must be disclosed
II The initial offering price of each maturity must be disclosed
III The participation amount of each underwriter does not have to be disclosed
IV The names of the underwriters do not have to be disclosed

A. I and II only
B. III and IV only
C. I, II, IV
D. I, II, III, IV

Answer 33

The best answer is D.

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 (though this information is readily available) nor their participation amounts (since this in no way affects the customer).

Question 34

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

Answer 34

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.

Question 35

A municipal dealer places an order with the syndicate manager for a G.O. bond new issue. 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 “member takedown” order by the manager

A. I only
B. I and II
C. II and III
D. I, II, III

Answer 35

The best answer is D.

An order placed with the syndicate by a member for an “accumulation account” is 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, 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.

Question 36

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

Answer 36

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.

Question 37

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

Answer 37

The best answer is A.

Oral agreements to repurchase 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 at customer request.

Question 38

Which of the following are NOT considered to be advertising by the MSRB?

I Official Statements
II Prospectuses
III Circulars
IV Form letters

A. I and II only
B. III and IV only
C. I, II, and III
D. I, II, III, IV

Answer 38

The best answer is A.

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 or prospectuses, since their content is subject to legal oversight.

Question 39

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

Answer 39

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.

Question 40

Municipal securities advertising must be approved prior to use by which of the following?

I Municipal Securities Principal
II Financial and Operations Principal
III Municipal Securities Rulemaking Board
IV General Principal

A. I or III
B. I or IV
C. II or III
D. II or IV

Answer 40

The best answer is B.

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).

Question 41

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

Answer 41

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.

Question 42

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

Answer 42

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.

Question 43

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

Answer 43

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.

Question 44

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

Answer 44

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.

Question 45

An MFP (Municipal Finance Professional) gives $100 to the primary campaign of an elected official in which she is entitled to vote. The official wins the primary and the MFP gives another $200 to the same official’s general election campaign. Which statement is TRUE?

A. Because more than $250 was given to campaigns for the same official, this will result in a ban
B. Because the amount given to each campaign did not exceed $250, this will not result in a ban
C. Because the MFP is prohibited from giving any dollar amount to an elected official’s campaign, this will result in a ban
D. Because the MSRB rule only applies to non-MFPs, this will not result in a ban

Answer 45

The best answer is B.

The MSRB political contribution rule applies a limit of $250 to a contribution made by an MFP (Municipal Financial Professional) to each “campaign” without a 2-year ban being imposed. This MFP gave $100 to one campaign for the candidate (the primary) and $200 to another campaign for the same candidate (the general election), so there is no ban.

Question 46

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

Answer 46

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.

Question 47

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

Answer 47

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.

Question 48

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

Answer 48

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.

Question 49

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

Answer 49

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.

Question 50

Under MSRB Rule G-37, all of the following actions on the part of an MFP would result in a 2-year prohibition EXCEPT:

A. soliciting employees of the dealer to make political contributions to an issuer official
B. hosting a political reception for an issuer official on the dealer’s premises
C. engaging in personal volunteer work for an issuer official
D. consenting to the use of the MFP’s name on fund raising literature for an issuer official

Answer 50

The best answer is C.

Soliciting any person (fellow employee or not) to make a contribution to an issuer official is prohibited. Hosting a political reception on dealer premises is considered a solicitation is and prohibited. Furthermore, if the name of a dealer or MFP appears on fund raising literature, there is a presumption of solicitation. On the other hand, engaging in personal volunteer work is permitted.

Question 51

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

Answer 51

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.

Question 52

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

Answer 52

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!

Question 53

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

Answer 53

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!

Question 54

How much can a Municipal Finance Professional (MFP) contribute to the “clean up” campaign to pay off campaign debt of an ex-issuer official that is now out of office because she lost the general election?

A. 0
B. $100
C. $250
D. an unlimited amount

Answer 54

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.

Question 55

MSRB rules prohibit municipal firms from entering into which of the following transactions with an investment company?

A. Accepting a pre-sale order from an investment company for a new municipal issue
B. Acting as a broker’s broker for a large block of bonds that the investment company wishes to sell
C. Accepting portfolio trades for the investment company as compensation for sales of the investment company’s securities
D. Buying the securities issued by an investment company to fill existing customer orders

Answer 55

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.

Question 56

Under MSRB rules, which of the following records must be kept for specified time periods?

I Trade comparisons
II Official Statements
III Customer account statements
IV Customer complaints

A. III and IV only
B. I and II only
C. I, III and IV
D. I, II, III, IV

Answer 56

The best answer is C.

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

Question 57

Under MSRB rules, any claim, dispute, or controversy shall be submitted to arbitration at the instance of a:

I broker-dealer against another broker-dealer
II customer against a broker-dealer
III broker-dealer against a customer who has previously signed an arbitration agreement
IV broker-dealer against a customer who has not previously signed an arbitration agreement

A. II only
B. III and IV only
C. I, II, III
D. I, II, III, IV

Answer 57

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 I).

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 II). 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 III).

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 IV).

Question 58

Under MSRB rules, any claim, dispute, or controversy shall be submitted to arbitration at the instance of all of the following EXCEPT a:

A. clearing corporation 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

Answer 58

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; or clearing corporation to broker-dealer (Choices A and D).

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).

Question 59

The MSRB online system that gives non-professional investors key information about municipal securities, including issuer financial disclosures, notices of material events, real-time prices, and market statistics is called:

A. EMMA
B. SHORT
C. RTRS
D. MSIL

Answer 59

The best answer is A.

“EMMA” - the Electronic Municipal Market Access system - is an MSRB-created website established specifically for retail customer use. It gives municipal investors access to municipal disclosure documents and municipal price reporting at no charge. The information that the investing public can find on EMMA is:
New municipal issue offering documents (Official Statements) for most municipal bond issues, notes, and 529 plans;
Details of bonds that have been pre-refunded;
Ongoing disclosures by municipal issuers about their finances, including material event notices and annual financial information;
Real-time prices and yields for municipal bond trades, as reported through RTRS (Real Time Reporting System) and SHORT (Short-Term Obligation Rate Transparency System).