Municipal Securities Principal Exam

In a competitive underwriting, the issuer publishes a Notice of Sale inviting underwriting syndicates to submit sealed bids. The syndicate offering the lowest net interest cost (NIC) or true interest cost (TIC) to the issuer typically wins the bid. This method is commonly used for general obligation bonds and is required by many state laws for public entities.

In a negotiated underwriting, the issuer selects an underwriter and negotiates the terms of the offering directly, including the spread, coupon rates, and reoffering yields. This method provides more flexibility and is commonly used for revenue bonds and complex financings. The principal must ensure proper supervision of both methods, including verification that pricing is fair and that all MSRB rules regarding syndicate practices (Rule G-11) are followed.

Under MSRB Rule G-11, syndicate members must establish the priority of orders before the first offer of securities. The typical priority is: (1) presale orders (received before the syndicate wins the bid), (2) group net orders (where the entire spread benefits the syndicate), (3) designated orders (where the customer designates which members receive the takedown), and (4) member orders (placed by syndicate members for their own accounts).

The syndicate manager must communicate the priority provisions to all members and to the issuer. The priority can be changed by the syndicate manager during the order period, but all members must be notified. The principal must ensure that order allocation follows the established priority and that all members receive a written accounting of the syndicate settlement within 60 calendar days of the final settlement date.

MSRB Rule G-37 prohibits dealers from engaging in municipal securities business with an issuer for two years after certain political contributions are made. The rule is designed to prevent "pay-to-play" practices where firms make political contributions to elected officials who control the awarding of municipal securities business.

The two-year ban is triggered when a municipal finance professional (MFP) of the dealer contributes more than $250 to an official of an issuer for whom they are entitled to vote, or any amount to an official for whom they cannot vote. A de minimis exception allows contributions up to $250 per election per official by MFPs entitled to vote for that official. Dealers must report all contributions and municipal securities business on Form G-37 quarterly through EMMA. The principal must establish procedures to monitor MFP contributions and ensure compliance.

SEC Rule 15c2-12 requires underwriters of municipal securities offerings of $1 million or more to obtain a continuing disclosure agreement from the issuer before purchasing or selling the bonds. The issuer must agree to provide annual financial information and timely notice of certain material events to the EMMA (Electronic Municipal Market Access) system.

Material event notices must be filed within 10 business days and include events such as payment delinquencies, rating changes, bond calls, defeasances, and bankruptcy filings. Before recommending a municipal security, a dealer must review the issuer's continuing disclosure history to determine whether the issuer has complied with its disclosure obligations. The principal must ensure the firm has procedures to verify issuer compliance and to maintain access to EMMA for disclosure review.

MSRB Rule G-19 requires dealers to have a reasonable basis for recommending any municipal security or transaction to a customer. This involves two components: reasonable-basis suitability (the dealer must understand the security and believe it is suitable for at least some investors) and customer-specific suitability (the recommendation must be appropriate for the particular customer based on their investment profile).

Key factors include the customer's tax status (essential for tax-exempt municipal bonds), investment objectives, risk tolerance, time horizon, liquidity needs, and existing portfolio holdings. For retail customers, Reg BI obligations also apply, requiring the dealer to act in the customer's best interest. The principal must establish procedures to review municipal securities recommendations and ensure representatives are conducting proper suitability analysis, particularly regarding the tax implications of municipal bonds for each customer's situation.

Under MSRB Rule G-15, dealers must send written confirmations to customers at or before the completion of a municipal securities transaction. The confirmation must include trade details (CUSIP, description, par value, price, yield, settlement date), the firm's capacity (agent or principal), and any applicable accrued interest.

For bonds purchased at a premium, the confirmation must disclose that the amount paid exceeds the call price if the bond is callable, and the yield must be calculated to the lower of the yield to call or yield to maturity (the yield to worst). For bonds with special features such as sinking funds, put provisions, or variable rates, the confirmation must include appropriate disclosures. The principal must ensure all confirmations are accurate, complete, and delivered in a timely manner.

MSRB Rule G-8 specifies the books and records that municipal securities dealers must make and keep. These include records of all purchases and sales, customer account information, customer complaints, written supervisory procedures, political contributions (G-37 records), correspondence, and records related to syndicate activities.

MSRB Rule G-9 establishes the retention periods for these records. Most records must be preserved for at least three years, while certain records such as customer account information and written supervisory procedures must be kept for six years. Political contribution records must be retained for six years as well. Records may be maintained electronically provided they meet the same accessibility and preservation requirements as physical records. The principal must ensure the firm's recordkeeping systems comply with both rules and that records are available for regulatory examination.

EMMA (Electronic Municipal Market Access) is the MSRB's centralized platform for municipal securities disclosure and transparency. It serves as the official repository for official statements, continuing disclosure documents, trade data, and other information about municipal securities. EMMA is free and available to the public.

Under MSRB Rule G-14, dealers must report municipal securities transactions to the RTRS (Real-Time Transaction Reporting System) within 15 minutes of execution. The reports must include the CUSIP, par value, price or yield, trade time, and capacity (agent or principal). This data is disseminated through EMMA to provide market transparency. The principal must ensure that all trades are reported accurately and within the required timeframe, and must establish procedures to monitor reporting compliance.