MSRB Rules Flashcards

Question

Under MSRB rules, which of the following would NOT lead to regulatory scrutiny? A. Guaranteeing a customer account against loss B. Recommending the purchase of a put option to the customer as protection against loss C. Agreeing to repurchase bonds from a customer personally at a preset price D. Recommending the purchase of municipal bonds in an IRA

Answer 1

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. Repurchase agreements using exempt securities are not defined as a "guarantee" 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). Municipal bonds should never be purchased in an IRA because they have a lower yield than taxable investments. An IRA account grows tax deferred and the client's interests would be better served by purchasing higher-yielding taxable issues.

Answer 2

The best answer is B. 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 have enforcement power. The MSRB would simply hand the complaint to FINRA, who enforces MSRB rules for broker-dealers.

Answer 3

The best answer is C. Municipal dealers participate in bidding for new issues, distribute quotes; take inventory positions (long positions) in municipal issues; and handle transactions for customers on an agency basis. Short positions are not taken due to the thin trading market for municipals, which makes short covering difficult.

Answer 4

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. Since the municipal firm is acting as an agent (middleman) in the transaction, a commission is charged. There is no requirement to provide a client with a copy of the Official Statement prior to executing a secondary market trade. The Official Statement is a municipal new issue disclosure document.

Answer 5

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 nor is there a requirement to direct the customer to a dealer that physically has those bonds.

Answer 6

The best answer is D. 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, nor is there a requirement to direct the customer to a dealer that physically has those bonds. The dealer would not sell short the bonds to the customer, since short covering is very difficult in the thinly traded municipal market.

Answer 7

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.

Answer 8

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 the Official Statement is available, it must be given to purchasers at, or prior to, settlement of sale.

Answer 9

The best answer is D. 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. Municipal bonds are also not subject to the Trust Indenture Act of 1939. This document 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.

Answer 10

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.

Answer 11

The best answer is D. In competitive bid municipal underwritings, the offering price of each maturity must be disclosed, but there is not requirement to disclose the spread, which is typically very thin. There is no requirement to disclose the participation amounts of the underwriters (since this in no way affects the customer). However, the order priority provisions must be disclosed (the usual priority is Pre-Sale; Group Net; Designated; Member Takedown-remember; Pro Golfers Don't Miss!). Obviously, the names of other clients who purchased the issue are confidential.

Answer 12

The best answer is B. In negotiated municipal underwritings, the spread (underwriter's discount) 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).

Answer 13

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.

Answer 14

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.

Answer 15

The best answer is A. Oral agreements to repurchase municipal 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 on customer request.

Answer 16

The best answer is C. 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, since their content is similar to Prospectuses, and they are subject to legal oversight (Official Statements are written by the Bond Counsel).

Answer 17

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.

Answer 18

The best answer is D. 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).

Answer 19

The best answer is B. Under MSRB rules, any advertisement that shows an interest rate or yield must state whether the rate of return shown is the coupon rate or the yield to maturity; and if the yield is being shown, it must be stated if it is yield to maturity, or yield to call date.

Answer 20

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.

Answer 21

The best answer is B. Since this firm effects trades solely on an agency basis, it carries no inventory and is not a market maker. Thus, its claim to make large size markets in municipal bonds is untrue. 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.

Answer 22

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.

Answer 23

The best answer is C. Under Rule G-37 covering political contributions, a Municipal Finance Professional is defined as an associated person (not a clerical employee) that solicits business from issuers or that performs advisory work or research for issuers. Any municipal principal that supervises these functions is also an MFP. An associated person that deals with individual customers is excluded from the definition, as are the executive officers of the dealer.

Answer 24

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.

Answer 25

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.

Answer 26

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.

Answer 27

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.

Answer 28

The best answer is C. An MFP (Municipal Finance Professional) can give up to $250 to an elected official’s campaign in which he or she is entitled to vote with no problems. If more is given, the employing firm will be banned from engaging in municipal securities business with that issuer for 2 years. Municipal securities business includes performing negotiated underwritings or municipal advisory work for that issuer. It does not include competitive bid underwritings, because the decision of the underwriter cannot be “influenced.”

Answer 29

The best answer is B. An MFP (Municipal Finance Professional) can give up to $250 to an elected official’s campaign in which he or she is entitled to vote with no problems. If more is given, the employing firm will be banned from engaging in municipal securities business with that issuer for 2 years. In addition, if an MFP gives ANY amount to an elected official’s campaign in which he or she is not entitled to vote, this will result in a ban. This is the situation in this question. The issue here is so-called “pay-to-play” - that by giving big election campaign contributions, the elected official, if he or she wins, could steer future underwriting business to the MFP’s employer. Municipal securities business includes performing negotiated underwritings or municipal advisory work for that issuer. It does not include competitive bid underwritings, because the decision of the underwriter cannot be “influenced.”

Answer 30

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.

Answer 31

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! Non-MFPs are not in a position to use campaign contributions as "payment" to an issuer official in return for getting future underwritings or financial advisory work from that municipality - so the rule does not apply.

Answer 32

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!

Answer 33

The best answer is C. Because this person is out of elected office at the time of soliciting money to pay for the election debt, she is no longer considered to be an “issuer official” and Rule G-37 no longer applies. Note that if she still were in her elected position (e.g., during the time window between losing the re-election campaign and the date when she left office), then the rule limiting contributions to $250 would still apply (otherwise the municipal securities firm would be subject to a 2-year ban). Since she is out of office, she is not in a position to direct underwriting business to a municipal firm, so G-37 is not applicable.

Answer 34

The best answer is B. 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.

Answer 35

The best answer is A. 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.

Answer 36

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 D). 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 A). 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 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).

Answer 37

The best answer is D. Consider this to be a learning question about EMMA (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). 10Qs and 10Ks are corporate disclose documents that would be found on a similar system named EDGAR.