Product-Specific Disclosures: Municipal Securities, Government Securities, and CMOs

Municipal bonds, government securities, and collateralized mortgage obligations (CMOs) each have their own advertising rules. These products are regulated by the Municipal Securities Rulemaking Board (MSRB) for munis and FINRA Rule 2216 for CMOs and government securities.

Municipal Securities (MSRB Rule G-21)

The MSRB regulates advertising for municipal securities through Rule G-21:

Advertising Standards

  • No dealer may publish any advertisement concerning municipal securities that the dealer knows or has reason to know is materially false or misleading
  • This is a "knew or should have known" standard. Ignorance is not a defense if the dealer should have caught the error.

Principal Approval

  • Advertisements must be approved in writing by a municipal securities principal or general securities principal prior to first use
  • Records of all advertisements must be maintained in a separate file

Exam Tip: Gotchas

  • MSRB Rule G-21 requires written principal approval for muni ads before first use. This is similar to retail communication rules under FINRA, but the approval comes from a municipal securities or general securities principal specifically.

Official Statements (SEC Rule 15c2-12)

  • Requires underwriters of municipal securities to obtain and distribute official statements (the municipal equivalent of a prospectus) to investors
  • The official statement contains financial and operating data about the issuer and the terms of the bonds

Government Securities and CMOs (FINRA Rule 2216)

Collateralized mortgage obligations are complex products that require special communication rules to protect retail investors.

CMO Product Name Requirement

  • All retail communications and correspondence concerning CMOs must include the term "Collateralized Mortgage Obligation" in the product name
  • The full name cannot be abbreviated to just "CMO" in advertisements

Exam Tip: Gotchas

  • "Collateralized Mortgage Obligation" must appear in full in CMO retail communications and correspondence. Simply writing "CMO" is not sufficient.

Educational Material for Retail Investors

Before selling a CMO to a non-institutional investor, a member must offer educational material covering:

  • Characteristics and risks: credit quality, prepayment rates, average lives, interest rates

  • Structure of a CMO: types of tranches and the rights and risks associated with each

  • The relationship between mortgage loans and mortgage securities

  • Tax considerations, minimum investments, transaction costs, and liquidity

  • When: Before selling to a non-institutional investor

  • What: Educational material covering risks, structure, and tax

  • How: Must be offered to the customer

  • Mandatory delivery? No. The material must be offered, not necessarily delivered.

Exam Tip: Gotchas

  • Before selling a CMO to a retail customer, the member must offer educational material, not deliver it. The customer can decline.
  • This requirement applies only to non-institutional (retail) investors. Institutional investors do not need to be offered the educational material.

Radio and Television CMO Advertisements

Radio or television advertisements for CMOs must include this specific oral disclosure:

"The yield and average life reflect prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life."

Think of it this way: The key risk unique to CMOs is prepayment risk, which causes the actual yield and average life of a CMO tranche to differ from initial projections. The required broadcast disclosure addresses exactly this risk.

Exam Tip: Gotchas

  • The required radio/TV CMO disclosure specifically addresses prepayment assumptions and their impact on yield and average life. If the exam asks what the broadcast disclaimer must cover, the answer is prepayment risk.

General Compliance

  • Government securities and certificates of deposit (CDs) communications must also comply with FINRA Rule 2210 general content standards
  • The fair-and-balanced requirement applies on top of any product-specific rules