MSRB Rules & Regulatory Framework
The MSRB: Structure and Authority
The Municipal Securities Rulemaking Board (MSRB) is the self-regulatory organization responsible for writing rules that govern the conduct of broker-dealers and municipal advisors in the municipal securities market. Established by Congress under the Securities Acts Amendments of 1975, the MSRB plays a central role in protecting investors and issuers in the municipal market.
A critical distinction to understand is that the MSRB writes rules but does not enforce them. Enforcement of MSRB rules for broker-dealers is carried out by FINRA and the SEC. For banks dealing in municipal securities, enforcement is handled by federal bank regulators (the OCC, Federal Reserve, and FDIC). This separation of rulemaking and enforcement is unique to the municipal market and is a frequently tested concept on the Series 52 exam.
The MSRB is governed by a board of directors consisting of individuals from a range of backgrounds, including representatives of broker-dealers, municipal advisors, issuers, investors, and members of the public. The board's composition is designed to ensure that all stakeholders in the municipal market have a voice in rulemaking.
Key Concept
The MSRB has jurisdiction over broker-dealers and municipal advisors who participate in the municipal securities market. It does NOT have jurisdiction over issuers (state and local governments) themselves. The MSRB cannot require issuers to file disclosure documents or comply with its rules directly.
Core MSRB Rules for Municipal Securities
Rule G-17: Fair Dealing
Rule G-17 is the MSRB's foundational conduct rule. It requires that in the conduct of its municipal securities or municipal advisory activities, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice. This broad rule underpins all other MSRB conduct rules and serves as a catch-all for misconduct that may not be specifically addressed by other rules.
In the underwriting context, Rule G-17 has been interpreted to require underwriters to provide fair dealing disclosures to issuers. The underwriter must disclose its role and financial interests, the nature of the arm's-length relationship, and any conflicts of interest. This is particularly important in negotiated underwritings where the issuer may mistakenly believe the underwriter is acting as a fiduciary.
Rule G-19: Suitability and Know Your Customer
Rule G-19 requires that recommendations made to customers must be suitable based on the customer's investment profile, including investment objectives, financial situation, tax status, risk tolerance, liquidity needs, time horizon, and other relevant factors. Before making recommendations, the dealer must make reasonable efforts to obtain this information from the customer.
For municipal securities specifically, suitability analysis must consider the customer's tax bracket (to evaluate the benefit of tax-exempt income), sensitivity to AMT (if recommending private activity bonds), need for liquidity (given that many munis trade infrequently), and credit risk tolerance.
Rule G-30: Fair Pricing
As discussed in Chapter 5, Rule G-30 requires that prices and commissions charged by municipal securities dealers must be fair and reasonable, taking into account all relevant factors. The prevailing market price is the benchmark against which the fairness of a markup or markdown is evaluated.
Rule G-37: Political Contributions
Rule G-37, commonly known as the "pay-to-play" rule, is one of the most important and heavily tested MSRB rules on the Series 52 exam. The rule prohibits a broker-dealer from engaging in municipal securities business with an issuer for two years after certain political contributions are made to officials of that issuer who can influence the awarding of municipal securities business.
Critical Rule: G-37 Details
Two-year ban: A contribution triggers a two-year prohibition on municipal securities business with that issuer. De minimis exception: Contributions of $250 or less per election to an official for whom the contributor is entitled to vote do not trigger the ban. Who is covered: Municipal finance professionals (MFPs), executive officers, and PACs controlled by the dealer. Lookback period: Contributions made within two years before the dealer seeks business are also covered.
Rule G-20: Gifts and Gratuities
Rule G-20 limits gifts to persons other than employees of the dealer to $100 per person per year in the context of the dealer's municipal securities business. This rule prevents dealers from using excessive gifts to improperly influence business decisions. Normal business entertainment (meals, sporting events) is generally not subject to the $100 limit if the dealer is present, but lavish or excessive entertainment is prohibited.
Rule G-27: Supervision
Rule G-27 requires that each broker-dealer establish and maintain a system of supervision that is reasonably designed to ensure compliance with MSRB rules and applicable securities laws. The dealer must designate a principal (a qualified supervisory person) responsible for overseeing municipal securities activities, and must have written supervisory procedures that address all material aspects of the firm's municipal business.
| MSRB Rule | Subject | Key Requirement |
|---|---|---|
| G-17 | Fair Dealing | Deal fairly; no deceptive practices; underwriter disclosures to issuers |
| G-19 | Suitability | Recommendations must be suitable; know your customer |
| G-20 | Gifts & Gratuities | $100/person/year limit |
| G-27 | Supervision | Written supervisory procedures; designated principal |
| G-30 | Fair Pricing | Prices must be fair and reasonable |
| G-32 | Official Statement Delivery | Deliver OS to customers; file on EMMA |
| G-37 | Political Contributions | Two-year ban after prohibited contributions; $250 de minimis |
Additional Regulatory Framework
Registration and Qualification
Individuals who engage in municipal securities activities must be registered with the appropriate regulatory authorities and pass qualifying examinations. The Series 52 exam qualifies an individual as a municipal securities representative, allowing them to engage in sales, trading, and underwriting of municipal securities with public customers. The SIE exam is a prerequisite. Municipal securities principals must pass the Series 53 exam to supervise municipal securities activities.
Customer Complaints and Arbitration
MSRB Rule G-10 requires dealers to provide customers with educational material about the investor protection resources available to them, including the process for filing complaints. Customer disputes involving municipal securities are typically resolved through FINRA arbitration, which is a binding dispute resolution process that is generally faster and less expensive than litigation.
Books and Records
MSRB Rule G-8 requires dealers to maintain comprehensive records of their municipal securities activities, including records of all transactions, customer accounts, correspondence, complaints, and political contributions. Rule G-9 specifies the retention periods for these records, which range from three to six years depending on the type of record.
Anti-Money Laundering (AML)
Like all broker-dealers, municipal securities dealers must comply with the Bank Secrecy Act and implement an AML compliance program. This includes Customer Identification Programs (CIP), monitoring for suspicious activity, filing Currency Transaction Reports (CTRs) for cash transactions exceeding $10,000, and filing Suspicious Activity Reports (SARs) when appropriate. These requirements apply to municipal securities activities just as they do to all other securities business.
Key Takeaway
The MSRB writes rules but does not enforce them; FINRA and the SEC handle enforcement for broker-dealers. Key rules include G-17 (fair dealing), G-19 (suitability), G-20 (gifts limited to $100/person/year), G-30 (fair pricing), G-32 (official statement delivery), and G-37 (political contributions with a two-year ban and $250 de minimis exception). Municipal securities professionals must be properly registered and qualified, and firms must maintain adequate supervisory systems and comply with AML requirements.
Check Your Understanding
Test your knowledge of MSRB rules and the regulatory framework.
1. Who enforces MSRB rules for broker-dealers?
2. Under Rule G-37, a political contribution triggers a ban on municipal securities business with an issuer for how long?
3. Under MSRB Rule G-20, the annual gift limit per person is:
4. Which MSRB rule is the foundational conduct rule requiring fair dealing in all municipal securities activities?
5. The MSRB has regulatory jurisdiction over all of the following EXCEPT: