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Flashcards in Chapter 1.7 Deck (16):

Opening a new municipal account, the following must be obtained from a customer other than an institutional customer prior to settlement of a transaction:

-Name and address
-Whether the customer is of legal age(DOB is NOT required)
-Name and address of beneficial owners of the account if other than the customer
-Signature of registered representative or general securities principal
-Written authorization is discretionary
-Whether customer is employed by another broker/dealer
-Written authorization for hypothecation
-Don't need education background, or marital status.


What must a municipal securities dealer obtain following the opening of a new account?

-Investment objectives
-Financial background
-Tax Status


When making recommendations, representatives must consider:

-Safety of Principal
-Income needs
-Current or future liquidity needs

**If a transaction is deemed unsuitable, it may only be executed if it was unsolicited.
**Stating that put options are a guarantee against loss is prohibited.


When information from a customer is incomplete:

Recommendations may not be made


Recommendations made at an investment seminar

The MSRB applies the provisions of the rules regarding recommendations to potential customers and to customers who make inquiries from municipal advertising. Therefore, prior to making a recommendation, the RR must "know your customer" and have a reasonable basis for making a particular recommendation to that customer.


Discretionary Accounts

A MSRB Dealer Must:
-Obtain written authorization from the customer and the account must be accepted in writing by a municipal principal prior to allowing any transactions to be effected in the account.
-Determine that any transactions are "suitable" for the client unless the transaction is specifically directed by the customer and not recommended by the dealer.
-MSRB Principals must approve in writing on a daily basis each transaction in discretionary accounts
-Decisions as to "time and price" only do not require discretionary authorization.


Institutional Customer Account information - when opening a new account for an institution, the following account information is required prior to settlement of a transaction:

-Customer Name
-Principal Business Address
-Tax ID #
-Financial background and investment objectives
-Signatures of RR's and Principal
-Written discretionary authorization if applicable
-Written margin agreement, if applicable



Excessive trading in size and frequency in a customer's account by a salesperson.



No B/D shall guarantee or offer to guarantee a customer against loss in an account or transaction done for a customer. Put options and repurchase agreements shall not be deemed to be a guarantee against loss.


Sharing in Customer Accounts

No B/D shall share directly or indirectly in the profits and losses in a customer's account except in a private capacity which is in direct proportion to their financial contribution to the account.


Service Charges for transfer and safekeeping of customer securities held in Street name

May be levied if the charges are "fair and reasonable" and not discriminatory between customers.


Suitable investment for an investor in their early 60's who is looking for income and preservation of capital:

Choose insured municipal bonds with a moderate maturity providing a good yield.

**You would not choose Corporate bonds(taxable and risky) or variable rate municipals.


Suitable investment for an investor looking for tax-exempt interest and is conservative:

Choose AAA Municipals that provide a good yield but would not invest in zero coupon municipals.


Customer account transfers

If firms involved in a transfer are participants in a clearing agency registered with the SEC, the account will be transferred under the rules of the clearing agency. Otherwise, the MSRB requires the transfer of Form G-26 using the following procedures:
-After the customer's completion of transfer instructions, which are given to the receiving B/D, the instructions are sent to the carrying firm.
-The carrying firm then has 3 business days to validate the positions in the account or take "exception" to the transfer.
-Upon validation, the account is frozen. Open orders are canceled and no new orders may be accepted.
-The receiving and carrying parties must immediately establish fail-to-receive and fail-to-deliver contracts as of the date of validation against the long and short positions in the customer's account.
-The carrying firm must complete the transfer action to the receiving firm within four business days following validation.
-Any failed contracts due to the transfer must be closed out according to the MSRB close out procedures
-Any money or security position differences must be resolved promptly and are not valid objections to invalidate the transfer.
-If a client has non-transferrable assets, the carrying firm must request in writing prior to or at the time of transfer further instructions regarding disposition of the assets. These instructions could include:
-Liquidation of the assets
-Retention of the assets by the carrying party, or
-Moving the assets to another dealer who can hold the assets


When can the carrying firm "take exception" to the transfer?

Only if the carrying firm:
-Has no records of the accounts
-The transfer instructions are incomplete, or
-The transfer instructions contain an improper signature


Transactions with Sophisticated Municipal Market Professionals

A B/D who reasonably concludes that a customer is a Sophisticated Municipal Market Professional, will not have the same obligations that the firm would have when dealing with a customer that is not a sophisticated municipal market professional. Those differences are:
-Time of Disclosure: No obligation to ensure disclosure of material information that is reasonably accessible to the market.
-Transaction Pricing: No obligation to take action to ensure that transactions meeting all of the following conditions are effected at fair and reasonable prices:
-Transactions are non-recommended secondary market agency transactions.
-The B/D services have been explicitly limited to providing anonymity, communication, order matching, and/or clearance functions; and
-The B/D does not exercise discretion as to how or when the transactions are executed.

-Suitability: The B/D shall not have any obligation to perform a customer-specific suitability analysis.
-Bona Fide Quotations: The B/D disseminating an SMMP's "quotation" shall apply the same standards regarding quotations as if such quotations were made by another B/D
-Best Execution: The B/D shall not have any obligation to use reasonable diligence to ascertain the best market for the subject security.