Module 5 Part 5

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Module 5 Part 5
2013-01-14 16:14:40
Module Part

MOdule 5 Part 5
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    The following information is required under Rule G-8 of the MSRB rules for opening new accounts:
    • Name and address of the customer
    • The customer’s investment objectives 
    • The customer’s employer and if this person is employed with another broker/dealer
    • The age of the customer
    • The customer’s Social Security number (although this can be obtained after the customer has completed a trade)
    • The signature of the registered rep and the municipal securities principal or the BOM of the branch
  2. When accounts are opened for employees of other firms:
    • Written notice must be sent to the employer. 
    • Copies of the confirmations of ANY securities transactions must be sent to the employer.
    • Any other instructions from the employer must be followed.
    • Each order DOES NOT need to be authorized by the employer.
  4. Any securities transaction recommendation to a customer must be suitable for them, taking into account their financial status, objectives, and needs under Rule G-19. If a client requests a particular municipal issue, the broker/dealer MUST sell it to the client. The broker/dealer marks all such orders as "UNSOLICITED."
    The customer gives the broker/dealer or other person discretionary rights to buy and sell securities WITHOUT consulting them prior to entering the order. When making transaction recommendations on a discretionary account, the registered representative should only recommend transactions that are in the client’s best interest. Discretionary accounts are discussed in greater detail in the Customer Accounts, Module 11.
    The MSRB rules regulate all quotes given by MSRB traders. The MSRB rules state that all quotes must be fair and equitable. The MSRB rules also regulate bond traders, or brokers’ brokers who give quotes to individuals or firms. When broker/dealers buy for a customer, they do not have to obtain the "best" price, only a price that is "fair and reasonable."
  7. Delivery of Municipal Bonds

    Under the Uniform Practice Code, the following regulations apply on the delivery of municipal bonds:
    • Settlement of new issues of municipal bonds is always on the date that the manager of the syndicate sets. This is usually set at the time the bonds are offered, but it can be changed.
    • Regular-way deliveries are performed in THREE business days.  
    • Same-day deliveries OR cash trades are performed that day.
    • If the bond is not in default, the bond trades with accrued interest up to, but not including, the settlement date.
    • •If the bond is in default, it trades flat and no accrued interest is added to the buyer’s price of the bond.
    If a bond is delivered that is not in good deliverable form, the delivering broker has "failed to deliver" the securities. The receiving broker can file a reclamation form, requesting the bond or bonds not in good deliverable form be fixed and returned in "good deliverable form."
  9. Good deliverable form requires the following or the bond is considered a "fail to deliver" bond:
    • If the bond is registered, the registered owner must sign the bond.
    • The bond may not be mutilated
    • If the bond is a bearer bond, it must have all remaining coupons attached.
    • The bond must either have the legal opinion attached OR be sold EX-LEGAL, meaning the bond does not have the legal opinion of a bond law firm printed on it. •The bond must have the coupon, bond number, and the maturity date, which MUST be legible.
    • The CUSIP number on the bond DOES NOT have to be legible. (CUSIP is a trademark for the system that uniquely identifies securities trading in the United States. This system was developed as a way to standardize the identification and tracking of securities.)
    • IF any of the above items are not legible, the seller must get a CERTIFICATE OF AUTHENTICATION from the trustee. (The only exception to this legibility requirement is the CUSIP number.)
  10. Confirmations of all municipal securities transactions must be sent to the CONTRA DEALER (the dealer on the other side of the transaction), and must include the following:
    • Identification and description of the trade
    • Description of the bond
    • The par value of the bond 
    • If the securities are subject to redemption prior to maturity (callable)
    • The selling concession, if it is a new issue
    • If the bond is only available in book-entry
  11. Confirmations of the trade to customers must include the following:
    • A description of the security
    • The trade date
    • The settlement date
    • The dollar amount of the transaction
    • The accrued interest 
    • The lower of the yield to maturity (for bonds at a discountOR the yield to call (for bonds at a premium)
    • •Whether the firm acted as agent or principal in the transaction
    • •The name of the previous ownerOR an offer to furnish the name upon request


    If the bond is a STRIPPED BONDNEITHER the maturity date nor the par value is needed. Instead, the final payment date and the maturity value are shown.

    A STRIPPED BOND is one that has had its interest (coupons) removed and sold separately
  12. What is regular-way delivery for a municipal bond purchased in the secondary market?

    (A) One business day
    (B) Three business days
    (C) Five business days
    (D) Ten calendar days
    FIRE Drill
  13. Answer (B) Three business days. Three business days is regular-way delivery for a municipal bond purchased in the secondary market. Know this rule!
  15. Every broker/dealer who has representatives that buy and sell municipal securities for their customers MUST have at least two principals registered AND qualified as a municipal principal. Most broker/dealer firms with many branch offices have their municipal principal registered as a branch office manager.
  16. The municipal principal is responsible for the supervision of the activities of registered reps who trade municipal securities and must give approval for the following:
    • Any written OR e-mail communication OR correspondence by a representative to a customer prior to the communication being sent
    • Any opening of a municipal account prior to effecting any trade for the customer
    • Any trade order that is entered for a trade in municipal securities prior to or on the day the order is entered


    • ANY information sent to a client from a registered representative MUST have a principal’s signature on it. The ONLY document that can be sent without a signature by a principal is an Official Statement, as long as NOTHING else is with it AND no writing is on it.
    Candidates for registration as an MSRB representative must attempt to pass a qualifying test within 90 days of being hired. If they fail, they must pass the test within six months of being hired or they will be released. They must serve a 90-day apprenticeship before they can sell municipal securities during which time they are studying for their test and learning about the industry. If registered reps pass the Municipal Representatives Exam (Series 52), they can only sell municipal and government issues, but no mutual funds. If registered representatives pass the General Securities Exam (Series 7), they can sell everything except commodities.
    Registered representatives can deal with other brokers during the 90-day period or they can handle an order for an account, as long as they are salaried. If they are on commission, they cannot trade for customers until they pass the test and serve the 90-day apprenticeship. If registered representatives transfer to another firm, they need not serve an additional 90-day apprenticeship. Registered reps can act as financial advisers and traders. They can even underwrite, but they CANNOT supervise other registered reps. The supervision of registered representatives is left to those registered as PRINCIPALS.
  20. An MSRB representative CANNOT GIVE (OR RECEIVE) any gifts to (or from) a customer OR another broker/dealer that are worth more than $100 per year UNLESS it is business related. Cash or gifts worth $100 or less can be given without permission of the firm and the MSRB. Any gift over that amount can only be given (or received) with special permission from the MSRB.
  22. IF registered representatives charge fees to advise clients and recommend a specific municipal bond, they MUST disclose any financial interest in the bond on the part of the rep or the firm. Registered representatives must also tell any client to whom they recommend a particular municipal bond the credit rating of that bond. If the bond was underwritten within the last year, registered reps must also disclose whether the firm was a member of the underwriting syndicate.
    Correspondence is any communication to less than 25 customers OR prospective customers in an effort to buy or sell municipal securities, or to inform the recipient of information regarding municipal securities.It can be in the form of a regular letter or e-mail as promotional literature or an article from the media. It can be a reprint of an existing article, information from the research department of the firm, or information that representatives have written on their own behalf.
    Sales literature is any written communication to 25 or more customers or prospective customers in an effort to buy or sell municipal securities. It can be an email or a regular mail with information for the recipient.
    Is ANY material published or designed to be presented to the public in a newspaper, on TV or radio, and any other type of mass communication for use in promoting municipal securities.
  26. Correspondence and sales literature include:
    • Notices, circulars, and reports regarding municipal securities
    • Market letters and form letters
    • Telemarketing scripts or article reprints
    • Abstracts or summaries of an Official Statement
  27. Sales literature does not include
    • Official statements
    • Preliminary official statements
    • Listings of dealer offerings
  28. Advertising for the sale or purchase of municipal bonds by a municipal joint account MUST include all names of the members of the account. In addition, when the account agrees on a price at which they will buy or sell the securities, all members of the account must only refer to that price.
    • The members of the municipal joint account MAY NOT show the advertised priceONLY the agreed upon price.
    • If an individual member advertises the purchase or sale of the bonds to their own customers, they MUST still show all members’ names in the municipal joint account.
    • Settlement of the bonds must be made to the purchaser within 60 days of delivery of the securities to the syndicate. (Since the type of of days are not indicated, this means 60 consecutive calendar days; however, this is not specified the test.)
    • •A municipal joint account is usually known as a selling syndicate for a new issue.
    • •There are instances when an institutional account (banks, mutual funds, etc.) wants to buy or sell a large block of municipal bonds. In this case, one broker/dealer is hired to execute the trade, and then one to three other firms join in on filling the order. This is also called a municipal joint account.
    • •If the institutional investor is selling the bonds, the municipal joint account members most often sell the bonds to their own investors, but they all have to be at the same price.
    • •If the institutional investor is looking to purchase the bonds, the municipal joint account members may solicit their customers, but they must do the trade at the same price, and at the same time give the names of the other members of the joint account.
    • A control relationship with respect to municipal securities exists if a broker/dealer controls, is controlled by, or is under common control with an issuer of a security being issued by that municipality.
    • A broker/dealer executing transactions with customers of the firm must inform the customers of the control relationship prior to entering the order to purchase, sell, or exchange the municipal securities where the control relationship exists.
    • The firm MUST send a written disclosure prior to entering the order.
    • If the disclosure is not in writing prior to entering the order, then a written disclosure MUST be made prior to completion of the transaction.
    • •No firm can effect a transaction in a discretionary account for municipal securities where a control relationship exists UNLESS the trade has been specifically authorized by the customer.
  31. Any one of the following THREE METHODS can be used to resolve monetary disputes that may arise between investors, registered representatives, and firms.
  32. Arbitration
    This is the MOST COMMON method used because it is the most reasonable. ARBITRATION MUST be used if there is a disagreement between firms and/or registered representatives. A customer CAN initiate arbitration against a broker/dealer in a monetary dispute, but a broker/dealer cannot initiate arbitration against a customer UNLESS the customer agrees to it.
  33. Mediation
    MEDIATION is RARELY used — even though it is one of the more reasonable methods of resolving disputes because there is nothing binding.
  34. Litigation
  35. LITIGATION (the filing of a lawsuit) is the LEAST used form of dispute resolution because it is the most costly.
  36. Who must approve all correspondence regarding municipal bonds when sent by a registered representative to a customer?

    (A) Options principal
    (B) General securities principal
    (C) Municipal securities principal
    (D) The office manager
    FIRE Drill
  37. Answer (C) Municipal securities principal. The principal of the office would probably have a municipal principal’s license and could approve it, but office managers alone could not, unless they were specifically registered as a municipal securities principal.