MSRB Rules

MSRB Regulatory Framework

The Municipal Securities Rulemaking Board (MSRB) is the self-regulatory organization responsible for writing rules governing the municipal securities market. Established by Congress in 1975 through amendments to the Securities Exchange Act of 1934, the MSRB creates rules for broker-dealers and municipal advisors engaged in municipal securities and municipal advisory activities. Understanding the MSRB's key rules is the foundation of the Series 53 exam.

An important distinction to remember 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 the appropriate banking regulator (such as the OCC, FDIC, or Federal Reserve). This separation of rulemaking and enforcement is unique to the municipal securities market.

The MSRB's rules are organized into several series, each covering a different aspect of municipal securities activities. The "G" rules (General Rules) apply to broker-dealers and are the primary focus of the Series 53 exam. The "D" rules apply to definitions, and the "A" rules cover administrative matters. More recently, the MSRB has also adopted rules specifically for municipal advisors.

Overview of Key Rule Categories

• Conduct Rules (G-17 through G-20): Standards of professional conduct, including fair dealing, suitability, and gifts
• Uniform Practice Rules (G-12, G-15): Settlement, confirmation, and operational standards
• Supervisory Rules (G-27, G-28): Supervisory responsibilities and employee registration
• Trading Rules (G-13, G-14, G-30): Quotation practices, trade reporting, and pricing standards
• Disclosure Rules (G-32, G-36): Official statement delivery and reporting requirements
• Political Contribution Rules (G-37, G-38): Pay-to-play restrictions and consultant regulation
• Municipal Advisor Rules (G-42): Fiduciary duties of municipal advisors

Rule G-17: Fair Dealing

MSRB Rule G-17 is the cornerstone conduct rule for the municipal securities industry. 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 seemingly simple rule has broad and powerful implications.

Scope and Application

Rule G-17 applies to every aspect of a firm's municipal securities business, including:

• Underwriting activities and pricing
• Secondary market trading and markup practices
• Communications with issuers and investors
• Disclosure of material information
• Conflicts of interest management
• Supervisory practices

G-17 Underwriting Disclosure Requirements

In 2012, the MSRB issued significant interpretive guidance on Rule G-17 regarding the duties of underwriters to issuers. This guidance requires underwriters in negotiated offerings to make specific disclosures to issuers, including:

• Arm's Length Relationship Disclosure: The underwriter must disclose that it has a financial interest in the transaction that differs from the issuer's interest, that the underwriter's primary role is to purchase securities for resale, and that the underwriter is not acting as a fiduciary or municipal advisor to the issuer.
• Conflict of Interest Disclosures: The underwriter must disclose all actual and potential material conflicts of interest, including any payments to or from third parties, financial relationships with the issuer, and any profit-sharing arrangements.
• Transaction Risk Disclosures: The underwriter must disclose material financial risks and characteristics of complex municipal securities products, such as variable rate demand obligations (VRDOs), interest rate swaps, and derivatives.

Rule G-30: Pricing

MSRB Rule G-30 establishes the fundamental pricing standard for municipal securities transactions. The rule requires that the price at which a dealer purchases municipal securities from or sells them to a customer must be fair and reasonable, taking into consideration all relevant factors at the time of the transaction.

Fair and Reasonable Standard

The "fair and reasonable" standard is intentionally flexible, recognizing that the appropriate markup or markdown depends on the specific circumstances of each transaction. Factors relevant to determining fair pricing include:

• The best judgment of the dealer as to the fair market value of the securities at the time of the transaction
• The expense of executing the transaction
• The fact that the dealer is entitled to a profit
• The total dollar amount of the transaction
• The type of bond and its availability in the market
• The par value of the bonds involved
• The rating and quality of the bonds
• Whether the bonds are general obligation or revenue bonds

Agency vs. Principal Pricing

Rule G-30 applies differently depending on the dealer's capacity:

• Principal Transactions: The dealer buys from or sells to the customer at a net price that includes the dealer's markup or markdown. The compensation is embedded in the price and is not separately disclosed (though markup disclosure requirements now apply to same-day principal trades).
• Agency Transactions: The dealer acts as an agent and charges a separately disclosed commission. The commission must be fair and reasonable under the circumstances.

Rule G-32: Disclosures in Connection with Primary Offerings

MSRB Rule G-32 governs the delivery of disclosure documents in connection with new issues of municipal securities. This rule ensures that investors receive the information they need to make informed investment decisions when purchasing new municipal bonds.

Official Statement Delivery

Under Rule G-32, a broker-dealer selling a new issue of municipal securities to a customer must deliver the official statement (OS) to the customer by settlement. If an official statement has been prepared by or on behalf of the issuer, the managing underwriter must:

• Send the official statement to any broker, dealer, or municipal securities dealer upon request
• Submit the official statement to EMMA within one business day of receipt from the issuer
• Submit Form G-32 information (including offering terms and underwriting spread) to EMMA by the date of first execution of a transaction in the new issue

Key G-32 Information Submitted to EMMA

• The CUSIP numbers for each maturity
• The initial offering prices or yields for each maturity
• The underwriting spread (expressed as a percentage or dollar amount)
• Information about the managing underwriter and other syndicate participants
• Whether the issue is a negotiated or competitive sale
• Credit ratings, if assigned
• Credit enhancement information, if applicable

Rules G-37 and G-42

Rule G-37: Political Contributions

Rule G-37 is the MSRB's pay-to-play rule, designed to sever the connection between political contributions to issuer officials and the award of municipal securities business. This rule is covered in depth in Chapter 4, but key points include:

• Dealers are prohibited from engaging in municipal securities business with issuers for two years after certain political contributions
• Municipal finance professionals (MFPs) are subject to strict contribution limits
• De minimis exceptions exist for contributions of $250 or less to officials for whom the MFP is entitled to vote
• Dealers must report political contributions and municipal securities business quarterly to the MSRB

Rule G-42: Duties of Non-Solicitor Municipal Advisors

Rule G-42, adopted in 2016, establishes standards of conduct and duties for municipal advisors. While the Series 53 primarily covers broker-dealer obligations, understanding G-42 is important because it defines the boundary between underwriter conduct (governed by G-17) and municipal advisor conduct (governed by G-42).

Key provisions of Rule G-42 include:

• Fiduciary Duty: Municipal advisors owe a fiduciary duty to their municipal entity clients, including duties of care and loyalty. This is a higher standard than the arm's-length relationship between underwriters and issuers.
• Duty of Care: The municipal advisor must exercise reasonable care when making recommendations, including performing a reasonable investigation and analysis
• Duty of Loyalty: The municipal advisor must deal honestly and with utmost good faith, placing the client's interests ahead of its own
• Disclosure Requirements: Municipal advisors must make extensive disclosures about conflicts of interest, compensation, and material information
• Documentation: Municipal advisors must document the scope of their engagement and the basis for their recommendations