MSRB rules and regs mostly for inside the firm
G-20: Gifts and gratuities
We need to be careful when we think about “gifts” in the sense of securities. Are we talking about a gift like we’d give our child, partner, or friend? Or are we talking about a “gift” we give someone, hoping they will do more business with us in the future. Gifts and “marketing expense” can be very close in this industry, but there are lines that clearly can be crossed, and bribery, extortion, and real crimes are why there are rules we have to follow.
In the realm of gifts for family, friends, things like that, brokers, dealers, and municipal securities dealers cannot give a gift valued at more than $100 to anyone not affiliated with the firm giving the gift. Firms have no real limits on the gifts they can give their affiliated persons and employees.
The gifts that seem like gifts, but in practice because of the motivation behind them, don’t have a practical limit in some sense. These have some common sense with them. Some exemptions to the $100 gift rule, because in practice they are more marketing expenses would include;
- Tickets to join a representative at a local sporting event or music event. The hosting rep would talk about their services, how they help clients, things like that, and the rep who got the tickets, likely would be listening to the very generous person. These types of things have to be occasional. No season tickets, no “here is a set of tickets for you and a guest”, it is “you are invited to an event hosted by such and such company”, and you go with them.
- Occasional dinners. Similar to sporting event, if someone takes you out to a $300 a plate dinner, you likely will be very polite and listen to everything they talk about, with how their company can help your clients, and your business, and whatever else while you’re eating a very nice dinner.
- Things like that. Usually they are in larger groups, “10 people from your office”, for example.
G-22: Control relationships
The MSRB definition of a control relationship is; “if a broker, dealer, municipal securities dealer, or any other person associated with one of them, controls, is controlled by, or is under common control with the issuer of the security or a person other than the issuer who is obligated, directly or indirectly, with respect to debt service on the security.”
All control relationships must be disclosed in writing. These are not necessarily a problem, but there easily could be, so they have to be disclosed so everyone involved can do their proper due diligence. In the current industry, there are lots of control relationships involved.
If the firm wants to place an order in a client’s discretionary account involving bonds or other securities, when there is a control relationship with the firm, they must disclose it before executing the transaction. Normally, in discretionary accounts, no contact is required before a trade. If the trade involves a control relationship, the client must be notified and the existence of the control relationship must be disclosed, and then the client must provide written authorization for each transaction before it can be done.
G-28: Transactions with employees/partners of other MSRB members
A person associated with an MSRB member firm can open accounts at other MSRB member firms, but everyone follows this rule. When the employee (spouse and/or minor children included), wants to open at a new firm, the new firm must first notify the employing firm before the account can ever be opened. This is a notification, not a permission.
Once the account is opened, again after the employing firm has been notified, the carrying firm is required to provide a duplicate copy of all confirmations sent to the customer, and the carrying firm must act in accordance with any written instructions sent by the employing firm, with respect to transactions that can be effected in the account.
G-29: Availability of board rules
Dealers are required to keep a copy of all rules of the MSRB, and make sure it is updated from time to time, and must make those rules available to any customer for examination promptly upon request. The rules are kept in every office in which any municipal securities representatives are conducting business.
G-31: Reciprocal dealings with municipal securities investment companies
The manager of a municipal securities bond fund, a municipal bond fund, potentially does a lot of municipal securities business, and would be a very profitable client for any municipal firm to carry. That is why this rule exists. MSRB says that no broker, dealer, or municipal securities dealer can solicit transactions in municipal securities with any investment company as defined under the Investment Company Act of 1940, as compensation or in return for sales by such a professional. They may engage with MSRB member firms based on their skill, service, and similar, but not for sales generated.
G-37: Political contributions
The purpose is to prevent bribery or similar interference. Company A gives a massive political contribution to a mayoral candidate’s campaign, that candidate wins, and coincidentally enough, Company A was just awarded a massive contract by that city’s newest mayor. Weird how that happened. Well, can’t here as there is a 2-year ban. No dealer may engage in municipal securities business with a municipality within 2 years of contributing to the campaign of someone who could select the dealer. No municipal advisor may engage in municipal advisory business with a municipality within 2 years of contributing to the campaign of someone who could select the advisor.
Sophisticated Municipal Market Professional (SMMP)
SMMPs are defined by 3 requirements: the nature of the customer, a determination of how sophisticated they are by the firm, and an affirmation by the customer.
The nature of the customer would mean being a bank, savings and loan association, insurance company, registered investment company, an investment advisor under the Investment Advisor Act of 1940 or the Uniform Securities Act, or any institutional investor (assets of at least $50m).
The firm must have a reasonable basis to believe that the customer is capable of evaluating the risks and market value independently, both with this particular transaction and the municipal market as a whole.
The customer must also agree that they have timely access to material information publicly available through established industry sources, and indicate they are exercising independent judgment in evaluating the following;
- The recommendations of the firm
- The quality of execution of the transactions, and
- The transaction price for non-recommended secondary market agency transactions, as to which the dealer’s services have been explicitly limited to providing anonymity, communication, order matching, and/or clearance functions, and the dealer does not exercise discretion as to how or when the transactions are executed.
Use of ownership information obtained in a fiduciary or agency capacity
If a municipal securities dealer, broker, or any affiliated person comes into privileged information, they are always prohibited from using it. They could be in a fiduciary, underwriting, or other relationship with a municipality and come into possession of information. They are not allowed to use that, they are not allowed to share that.