Recordkeeping & Compliance — Series 53

Rule G-8: Books and Records

MSRB Rule G-8 specifies the books and records that broker-dealers engaged in municipal securities activities must make and keep. These records form the foundation of a firm's compliance infrastructure and are essential for regulatory examinations, customer dispute resolution, and supervisory oversight. The Municipal Securities Principal must ensure that all required records are created, maintained, and accessible.

Rule G-8 is one of the most detailed MSRB rules, specifying dozens of record categories. The records required under G-8 are complementary to records required under SEC Rule 17a-3 (the general broker-dealer recordkeeping rule). In many cases, a firm's records will satisfy both MSRB and SEC requirements, but some records are unique to municipal securities activities.

Key Records Under Rule G-8

The principal types of records required include:

Account Records: Customer account information, including name, address, tax identification number, investment objectives, and suitability information. These records must be updated periodically (at least every 36 months for active accounts).
Transaction Records: Details of every municipal securities transaction, including the security description, trade date, settlement date, quantity, price or yield, capacity (principal or agent), and commission or markup.
Position Records: Inventory records showing the firm's proprietary positions in municipal securities, including cost basis, acquisition date, and current valuation.
Syndicate Records: Records of all underwriting syndicate participations, including syndicate letters, allocation records, and settlement statements.
Customer Complaint Records: Records of all customer complaints, including the complaint itself, investigation notes, and resolution.
Communications Records: Copies of all advertising, correspondence, and communications with customers and issuers related to municipal securities.
Political Contribution Records: Records of all political contributions made by the firm, MFPs, and dealer-controlled PACs, as required by Rule G-37.
Supervisory Records: Written supervisory procedures, evidence of supervisory reviews, and exception reports.

Books and Records: The comprehensive set of documents, data, and information that a broker-dealer must create and maintain to evidence its business activities, compliance with regulations, and supervisory practices. These records must be accurate, complete, and readily accessible for regulatory examination.

Rule G-9: Preservation of Records

While Rule G-8 specifies what records must be made, MSRB Rule G-9 specifies how long those records must be preserved. The principal must ensure that the firm's retention policies comply with the minimum retention periods specified by Rule G-9.

Retention Periods

Record Type	Retention Period	Notes
Account records	6 years after account closed	Includes all customer information
Transaction records (blotters)	6 years	Purchase and sale blotters
Customer confirmations	6 years	Copies of all confirmations sent
Customer complaints	6 years	Including investigation and resolution
Syndicate records	6 years	Syndicate letters, allocations, settlements
Communications / advertising	3 years	All correspondence and ads
Political contribution records	6 years	G-37 contribution data
Written supervisory procedures	Life of firm + 3 years	Current and all prior versions

For the Series 53 exam, remember the general rule: most records must be retained for 6 years. The notable exceptions are correspondence and advertising (3 years) and written supervisory procedures (life of the firm plus 3 years). When in doubt, 6 years is usually the correct answer on the exam.

Financial and Net Capital Requirements

Municipal securities dealers must comply with net capital requirements under SEC Rule 15c3-1. The Municipal Securities Principal should understand these requirements even though they are primarily overseen by the firm's financial and operations principal (FinOp). The net capital rule is designed to ensure that broker-dealers maintain sufficient liquid assets to protect customers and meet their obligations.

Net Capital Rule Overview

The net capital rule requires broker-dealers to maintain minimum net capital based on the type and scale of their activities:

Alternative Method: Most larger firms use the alternative method, which requires net capital equal to the greater of $250,000 or 2% of aggregate debit items (money owed to the firm by customers and other parties).
Basic Method: Smaller firms may use the basic method, which requires net capital equal to the greater of $100,000 or 6-2/3% of aggregate indebtedness (money the firm owes to others).
Municipal Securities Only: A firm that engages only in municipal securities transactions on an agency basis may have a lower minimum net capital requirement, typically $5,000.

Customer Protection Rule (SEC Rule 15c3-3)

The customer protection rule requires broker-dealers to segregate customer assets and maintain a reserve of cash or qualified securities in a special reserve bank account. This rule ensures that customer property is protected in the event of a firm failure. Key provisions include:

Customer securities must be segregated from the firm's proprietary securities
The firm must compute its reserve requirement weekly
Excess customer funds must be deposited in a special reserve bank account by the prescribed deadline
The firm may not use customer securities for its own purposes without proper authorization

Compliance Program Administration

The Municipal Securities Principal plays a central role in the firm's compliance program for municipal securities activities. Under MSRB Rule G-27, the firm must establish, maintain, and enforce written supervisory procedures (WSPs) and a system of internal controls designed to ensure compliance with all applicable rules.

Elements of an Effective Compliance Program

Written Supervisory Procedures: Detailed, current procedures addressing every aspect of the firm's municipal securities business, reviewed and updated at least annually
Supervisory Structure: Clear designation of supervisory responsibilities, with named individuals responsible for each area of the business
Training Programs: Regular training for all municipal securities professionals on regulatory requirements, firm procedures, and industry developments
Testing and Monitoring: Ongoing testing of the firm's compliance procedures, including periodic reviews, exception reporting, and surveillance
Annual Compliance Meeting: Under FINRA Rule 3110, firms must conduct an annual review of their supervisory system and WSPs
Branch Office Inspections: Periodic inspections of branch offices conducting municipal securities activities
Escalation Procedures: Clear procedures for escalating compliance issues, regulatory inquiries, and unusual activities to appropriate personnel

Continuing Education Requirements

MSRB Rule G-3, in conjunction with FINRA's continuing education requirements, requires that municipal securities professionals participate in both firm element and regulatory element continuing education:

Regulatory Element: Computer-based training that must be completed within 120 days of the second registration anniversary and every three years thereafter. Content is prescribed by FINRA and covers regulatory, compliance, ethical, and sales practice standards.
Firm Element: Annual training developed by the firm based on its specific business activities, regulatory developments, and compliance findings. The firm must conduct a needs analysis at least annually to determine appropriate training content.

A strong compliance program is not just a regulatory obligation; it is a business imperative. Firms with robust compliance programs experience fewer regulatory sanctions, lower litigation costs, and stronger reputations in the municipal market. The principal sets the tone for compliance culture and must lead by example.

Remember the G-8/G-9 distinction: G-8 = Make records (8 rhymes with "create"), G-9 = Preserve records (9 rhymes with "time" — how long to keep). Most records: 6 years. Communications: 3 years. WSPs: Life + 3.

Check Your Understanding

Test your knowledge of recordkeeping and compliance. Select the best answer for each question.

1. Under Rule G-9, most municipal securities records must be preserved for:

2. Which MSRB rule specifies what books and records must be created?

3. Written supervisory procedures must be retained for:

4. The Regulatory Element of continuing education must first be completed within how many days of the second registration anniversary?

5. How often must customer account information be updated for active accounts?