Municipal Securities Rules
The Municipal Securities Rulemaking Board (MSRB) is the self-regulatory organization that writes rules governing municipal securities dealers and municipal advisors. Understanding key MSRB rules is essential for the Series 7 exam.
MSRB Overview
What is the MSRB?
- Self-regulatory organization (SRO) for municipal securities
- Writes rules for dealers and municipal advisors
- Does NOT enforce rules (enforcement by FINRA and SEC)
- Created by Congress in 1975
- Operates EMMA disclosure system
Who Must Register with MSRB?
- Municipal securities dealers
- Municipal advisors
- Banks that deal in municipal securities
Rule G-17: Fair Dealing
Rule G-17 is the cornerstone of MSRB's investor protection rules.
The Rule States:
"In the conduct of its municipal securities activities, each dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest or unfair practice."
Key Obligations
For ALL Customers:
- Disclose all material facts known about the transaction
- Disclose material facts about the security that are reasonably accessible
- Must be disclosed at or before the time of trade
For Issuers (Underwriters):
- Disclose arm's-length relationship (not a fiduciary)
- Disclose conflicts of interest
- Disclose material risks of recommended financing structures
- Disclose compensation
Violations Include:
- Recommending unsuitable securities
- Failing to disclose material information
- Charging excessive markups/markdowns
- Discouraging use of municipal advisors
Rule G-37: Political Contributions
Rule G-37 restricts "pay-to-play" practices in municipal securities business.
The Problem It Addresses
Without this rule, dealers could make political contributions to officials who award municipal securities business, creating conflicts of interest.
Key Provisions
Two-Year Ban: If a dealer or municipal finance professional (MFP) makes a political contribution to an official of a municipal issuer, the dealer is banned from doing negotiated underwriting business with that issuer for two years.
Who Is Covered?
| Term | Definition |
|---|---|
| Municipal Finance Professional (MFP) | Anyone who solicits muni business, underwrites, or supervises those who do |
| Official of an issuer | Elected official or candidate who can influence award of muni business |
De Minimis Exception
An MFP may contribute up to $250 per election to officials for whom they are entitled to vote (in their jurisdiction).
What's NOT Prohibited?
- Competitive underwriting (sealed bids)
- Secondary market trading
- Personal contributions within de minimis limits
Disclosure Requirements
Dealers must report to MSRB quarterly:
- Political contributions by the firm, MFPs, and PACs
- Posted publicly on EMMA
Rule G-19: Suitability
Dealers must have reasonable grounds to believe a recommendation is suitable for the customer.
Customer-Specific Suitability
Consider the customer's:
- Investment objectives
- Financial situation and needs
- Tax status
- Risk tolerance
- Other investments (diversification)
Reasonable Basis Suitability
The dealer must understand the product and have a reasonable basis to believe it's suitable for at least some investors.
Rule G-30: Prices and Commissions
Dealers must charge prices that are fair and reasonable considering all relevant factors.
Factors to Consider
- Best execution
- Market conditions
- Size of transaction
- Services provided
- Expense to dealer
Markup Limits
There is no specific percentage limit, but excessive markups violate the rule. MSRB guidance suggests 1-3% is typical, but more may be appropriate in some circumstances.
Other Important MSRB Rules
| Rule | Subject |
|---|---|
| G-8 | Recordkeeping requirements |
| G-15 | Confirmation requirements |
| G-20 | Gifts and gratuities ($100 limit) |
| G-23 | Dealer acting as financial advisor |
| G-32 | Delivery of official statements |
| G-42 | Duties of municipal advisors |
Key Exam Points
- MSRB writes rules but doesn't enforce them (FINRA and SEC enforce)
- G-17 = Fair dealing with everyone
- G-37 = Political contribution restrictions (2-year ban, $250 de minimis)
- G-19 = Suitability for municipal recommendations
- G-30 = Fair and reasonable pricing
Under MSRB Rule G-37, if a municipal finance professional makes a political contribution to an issuer official, the dealer is banned from negotiated underwriting with that issuer for:
The MSRB (Municipal Securities Rulemaking Board):
Under MSRB Rule G-17, an underwriter in a negotiated municipal offering must disclose to the issuer:
The de minimis exception under MSRB Rule G-37 allows a municipal finance professional to contribute up to what amount per election to officials they can vote for?
5.1 Investment Company Basics
Chapter 5: Investment Companies