MSRB Rules Governing Municipal Securities

The Municipal Securities Rulemaking Board (MSRB) writes the rules dealers must follow when quoting, dealing with customers, and pricing trades. The MSRB does not enforce its own rules; FINRA and the SEC handle enforcement.

The MSRB has several rule families. The advertising rule and the municipal-disclosure rule are covered in Advertising and Communications. The uniform-practice rule (T+1 settlement), transaction-reporting rule (RTRS), and suitability rule are covered in Settlement and Trading.

This section covers the three dealer-conduct rules that govern day-to-day market activity (quotations, fair dealing, and fair pricing), plus the rules on employee accounts, business solicitation, and municipal fund securities reporting.

What Do the Quotation Rules Require?

• Dealers must not publish or circulate fictitious quotations
• Quotations must represent bona fide bids or offers (a genuine intent to buy or sell at the stated price)
• If a quotation is nominal (informational only), it must be clearly labeled as such

Key distinction:

• Bona fide quote = real intention to trade at that price
• Nominal quote = informational only, no obligation to trade; must be labeled

Exam Tip: Gotchas

• An unlabeled quote is assumed to be bona fide. If a dealer publishes a quote without marking it "nominal," they are obligated to trade at that price.

What Does the Fair-Dealing Rule Require?

• Dealers must deal fairly with all persons and must not engage in any deceptive, dishonest, or unfair practice
• In a negotiated underwriting, the underwriter has duties of fair dealing to the issuer, including:
  • Not misrepresenting or omitting material facts
  • An implied representation that the price paid to the issuer is fair and reasonable
  • Disclosure of all material risks, conflicts of interest, and the nature of the arm's-length relationship

Exam Tip: Gotchas

• The fair-dealing rule applies to ALL persons, not just customers. This includes issuers in negotiated underwritings. The underwriter must disclose conflicts of interest to the issuer.

What Does the Fair-Pricing Rule Require?

• Dealers must execute transactions at prices that are fair and reasonable considering prevailing market conditions
• Principal transactions: the markup or markdown from the prevailing market price must be fair and reasonable
• Agency transactions: the commission charged must be fair and reasonable
• Factors considered: prevailing market price, expense of executing the transaction, the value of services rendered, and the dealer's total compensation

Exam Tip: Gotchas

• The fair-pricing rule covers both principal and agency transactions. Principal trades use markups/markdowns; agency trades use commissions. Both must be fair and reasonable.

What Rules Cover Employee Accounts and Business Solicitation?

• Employee/partner accounts (G-28): Before opening or maintaining an account for a person the dealer knows is employed by, or a partner of, another municipal securities dealer (or that person's spouse or minor child), the dealer must first give the employing dealer written notice, then send that employing dealer a duplicate confirmation of every transaction in the account. This rule does not apply to municipal fund securities accounts.
• Solicitor payments (G-38): A dealer may not pay any non-affiliated person, someone who is not a partner, director, officer, employee, or registered person of the dealer or its affiliate, for soliciting municipal securities business on the dealer's behalf. "Solicitation" covers any direct or indirect communication with an issuer aimed at obtaining or keeping that business.
• Municipal fund securities reporting (G-45): Dealers that sell 529 plans, LGIPs, or ABLE accounts must report transaction information to the MSRB, a separate reporting obligation from the RTRS trade reporting that applies to ordinary municipal bonds.

Exam Tip: Gotchas

• G-28's duplicate-confirmation duty runs to the employing dealer, not the employee's own firm. The point is letting the employing dealer monitor its own employee's outside account.
• G-38 bars paying unaffiliated solicitors, not paying the dealer's own registered employees for bringing in business.

Who Enforces MSRB Rules?

The MSRB writes rules but does not enforce them. Enforcement is divided:

• FINRA enforces MSRB rules against broker-dealers
• The SEC enforces MSRB rules and has overall authority over the municipal securities market
• Federal banking regulators enforce MSRB rules against bank dealers

Exam Tip: Gotchas

• The MSRB writes rules but does NOT enforce them. Violations result in sanctions and fines from FINRA, the SEC, or banking regulators, not from the MSRB itself.

What Should You Check on Exam Day?

• An unlabeled quote is assumed bona fide; a nominal quote must be clearly labeled
• Fair dealing applies to everyone, including issuers in negotiated underwritings, not just customers
• Fair pricing covers both principal (markup/markdown) and agency (commission) transactions
• G-28 requires written notice plus duplicate confirmations to the employing dealer for an employee/partner account, but doesn't apply to municipal fund accounts
• G-38 bars paying unaffiliated solicitors for municipal securities business
• G-45 requires periodic reporting on 529/LGIP/ABLE transactions, separate from RTRS trade reporting
• The MSRB writes rules but does not enforce them; FINRA, the SEC, and federal banking regulators do