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 focuses on the three dealer-conduct rules that govern day-to-day market activity: quotations, fair dealing, and fair pricing.
Quotations
- 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.
Fair Dealing
- 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.
Fair Pricing
- 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.
Who Enforces These 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.