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 Compliance Corner is a quarterly electronic newsletter published by the MSRB to support the compliance obligations of brokers, dealers and municipal securities dealers (collectively "dealers") and municipal advisors. Compliance Corner highlights recent regulatory updates and resources to facilitate understanding of MSRB rules.
Winter 2022 Issue
Compliance in Focus: Tax and Liquidity Implications of Buying Discount Bonds
By Saliha Olgun, Director, Market Regulation
With the recent rise in interest rates and corresponding decline in municipal bond prices, there has been a significant increase in the amount of bonds being offered and trading at substantial discounts to their par value. The MSRB published an educational issue brief highlighting recent trade data and alerting investors to the tax and liquidity implications of buying municipal bonds at a discount. While these bonds may appear attractive because of potentially higher yields, investors need to understand that they could face significant tax consequences as a result of the IRS’s de minimis rule and have a harder time selling these bonds.
While institutional investors are generally well aware of these risks, individual investors may not be. Dealers, know your obligations under MSRB Rule G-47 regarding time of trade disclosure. Read MSRB interpretive guidance on disclosure of market discount.
Read the issue brief.
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Compliance Frequently Asked Questions (FAQs)
This periodic feature provides answers to commonly asked questions about compliance with MSRB rules. The answers to these questions do not create new legal or regulatory requirements or new interpretations of existing requirements and should not be interpreted by regulated entities or examining authorities as establishing new standards of conduct. This resource should be read in conjunction with MSRB rules and interpretations. The complete text of all MSRB rules and interpretations is available here.
Q: In the 2022 Report on the Financial Industry Regulatory Authority's (FINRA) Examination and Risk Monitoring Program it was noted that examiners identified firms using false and misleading statements or claims about safety, unqualified or unwarranted claims regarding the expertise of the firm, and promissory statements and claims regarding portfolio growth in municipal securities advertisements. Does this mean dealers and municipal advisors should assess their compliance programs to ensure that their advertisements comply with MSRB Rule G-21 and Rule G-40 respectively?
A: This information is helpful in understanding what one examining authority is observing and it would be prudent for firms to use this information as a data point when assessing their compliance programs. Both MSRB Rule G-21 and G-40 require that a principal review and approve each advertisement subject to the respective rule prior to first use. In assessing its compliance program, a firm should ensure that the appropriate principal responsible for reviewing advertisements is evaluating each advertisement consistent with the content standards of MSRB Rule G-21 and G-40, as applicable. This would include, at minimum, ensuring that advertisements are fair and balanced and do not contain false, exaggerated, unwarranted, promissory or misleading statements or claims.
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Compliance Tip: If the Shoe Fits, Wear It: Municipal Advisor Principals
The MSRB recently concluded its outreach to ensure that every municipal advisor firm has at least one person appropriately qualified with the Series 54, Municipal Advisor Principal Qualification Examination, in order to comply with the obligation, under MSRB Rule G-44, to have a supervisory principal in place, vested with the authority to carry out and effectively discharge the responsibility to supervise the municipal advisory activities of the municipal advisor and its associated persons. As a reminder all individuals who meet the definition of a municipal advisor principal - that is, a person who engages in the management, direction or supervision of the municipal advisory activities of the municipal advisor and its associated persons, must be qualified as a municipal advisor principal by taking and passing the Series 54 Examination.
Read Rule G-3, on Professional Qualification Requirements
Read Rule G-44, on Supervisory and Compliance Obligations of Municipal Advisors
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Compliance Calendar
Dealers and municipal advisors should note the following key compliance dates and deadlines relevant during the second quarter of calendar year 2022.
April 1, 2022 – First Day to File Form G-37 for quarter ending March 31
April 30, 2022 – A-11 Annual Municipal Advisor Fee Due
April 30, 2022 – Last Day to File Form G-37 for quarter ending March 31
May 1, 2022 – 529 underwriting assessment invoiced
May 31, 2022 – Last day to submit payments for 529 underwriting assessment
July 1, 2022 – First day to file Form G-37 for quarter ending June 30
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Enforcement Insight
This periodic feature summarizes a recent enforcement matter brought by an examining authority, which includes the SEC, FINRA or applicable bank regulator, relevant to the municipal securities market. Enforcement matters can, when applicable, inform firms and help identify potential compliance risks. Read about the MSRB’s regulatory coordination and enforcement support.
On December 20, 2021, FINRA announced that affiliated broker-dealers, Royal Alliance Associates, Inc., Sagepoint Financial, Inc., and FSC Securities Corporation (collectively Respondents) submitted a Letter of Acceptance, Waiver and Consent (AWC) for the purposes of settlement of alleged rule violations for the period from January 1, 2013, through June 30, 2018. The firms voluntarily self-reported potential issues with their supervisory system for 529 accounts and a proposed a plan to remediate affected customers as part of FINRA’s 529 Plan Share Class Initiative. FINRA has recognized the respondents’ extraordinary cooperation through their voluntary participation in the initiative.
529 plans are tax-advantaged municipal securities that are designed to encourage saving for the future educational expenses of a designated beneficiary. 529 plans are sponsored by states, state agencies, or educational institutions. Because 529 plans are municipal securities, the sale of 529 plans is governed by the MSRB's rules.
Shares of 529 plans are sold in different classes with different fee structures. One share class (Class A shares) will typically impose a front-end sales charge but charge lower annual fees compared to other classes. Another share class (Class C shares) will typically impose no front-end sales charge but impose higher annual fees than Class A shares. The cost of a Class A share versus a Class C share can be meaningful for an investor. It is important to understand the features of a particular 529 plan as some 529 plans reduce front-end sales charges if the aggregate amount invested meets certain thresholds, known as breakpoint discounts, and some 529 plans may also have rights of accumulation, which entitle investors to breakpoint discounts based on aggregated holdings across households or other related investments.
These affiliated firms shared written supervisory procedures and those procedures did not reasonably address the share-class suitability factors specific to 529 plan investments. The firms’ written supervisory procedures for 529 plans did not specifically address the relationship between account beneficiary age, the number of years until funds would be needed to pay qualified higher education expenses, and 529 plan share-class suitability. Instead, they directed representatives to consider the client’s investment objectives and associated costs, including “mutual fund load expenses,” when making a 529 plan recommendation. In addition, the firms maintained a transaction review system that did not include rules to identify 529 plan share class recommendations that appeared to be inconsistent with the age of the account beneficiary or the account’s stated time horizon. As a result, each of these firms violated MSRB Rule G-27(a), (b) and (c).
The firms agreed to a censure and pay restitution and estimated interest of $485,441 to affected customers who incurred excess fees from Class C share purchases.
The full details are available here.
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