Series 51 Municipal Fund Securities Limited Principal Exam

Correct: Under Section 15B of the Securities Exchange Act of 1934, the MSRB is established as a rulemaking body but is not granted the authority to enforce its own rules or conduct examinations. For municipal securities dealers that are banks, the authority to conduct compliance examinations and enforce MSRB rules is delegated to the appropriate federal banking agencies, including the OCC, the Federal Reserve, and the FDIC. Incorrect: The MSRB is a rulemaking body only and lacks statutory enforcement power. FINRA is responsible for enforcing MSRB rules for registered broker-dealers, but it does not have jurisdiction over bank dealers. SIPC’s role is limited to protecting customer assets during the liquidation of a failed broker-dealer and does not include the enforcement of municipal securities rules. Takeaway: The MSRB creates rules for the municipal securities market, but enforcement is handled by FINRA for broker-dealers and by federal banking regulators for bank dealers.

Correct: Under MSRB Rule G-17 and the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a municipal securities dealer and its principal have an affirmative obligation to ensure that all disclosures made to investors are accurate and do not omit material facts. In the context of a Local Government Investment Pool (LGIP), even though the pool is exempt from the Investment Company Act of 1940 under Section 2(b), the dealer must ensure that the official statement and marketing materials clearly describe the investment policy, the risks associated with the pool’s structure, and the fact that the securities are not guaranteed by the state or any other entity. The principal is responsible for supervising these activities to ensure that the information provided to local government participants is not misleading and aligns with the actual operational constraints of the pool. Incorrect: The suggestion to register the pool under the Investment Company Act of 1940 is incorrect because Section 2(b) of that Act specifically exempts state and local government entities and their investment pools from registration. Relying exclusively on a state treasurer’s certification is insufficient because while state law governs the formation of the pool, the dealer’s conduct in marketing and selling the interests is strictly governed by MSRB rules and federal antifraud statutes, which require independent due diligence regarding disclosures. Claiming that SIPC coverage protects against principal loss due to derivative risks is a fundamental misunderstanding of SIPC’s role; SIPC protects against the failure of a broker-dealer, not against market losses or the inherent investment risks of a municipal fund security. Takeaway: While LGIPs are exempt from the Investment Company Act of 1940, they remain subject to MSRB rules and federal antifraud provisions, requiring principals to ensure that all investment policies and structural risks are fully and fairly disclosed.

Correct: Under MSRB Rule G-26, the carrying party (the firm losing the account) has exactly one business day from the receipt of the Transfer Initiation Form (TIF) to either validate the instructions or protest the transfer. Once the TIF is validated, the carrying party must freeze the account, cancel all open orders, and complete the transfer of assets within three business days. This standardized timeline ensures that customer assets are not unnecessarily delayed during the transition between municipal securities dealers. Incorrect: The suggestion that a firm has three business days to validate a transfer is incorrect, as the rule mandates a one-business-day turnaround for validation to prevent firms from stalling the process. The idea that a transfer can be protested solely due to a debit balance is a common misconception; while a firm can protest if the account is not recognizable, a debit balance itself is typically handled through the transfer process if the receiving firm agrees to accept it. Finally, there is no requirement under Rule G-26 to report high-value transfers to the MSRB for anti-churning purposes, as the rule focuses on the mechanics of the transfer rather than the suitability of the move. Takeaway: MSRB Rule G-26 mandates a strict timeline of one business day for transfer validation and three business days for the completion of the asset transfer.

Correct: According to MSRB Rule G-11, the senior syndicate manager is required to communicate the priority provisions in writing to all syndicate members before the first offer of any securities. This rule ensures that all participants are aware of how orders will be allocated. If the priority provisions are changed after the initial communication, the manager must also provide prompt written notice of these changes to the syndicate members. Incorrect: Disclosing changes only in the final official statement is insufficient because syndicate members need this information to properly manage client expectations during the order period. Limiting disclosure only to members who submit orders during a specific window violates the requirement to inform all members before the first offer. Verbal communication of priority changes is inadequate under MSRB rules, which mandate written notification to ensure a clear and auditable trail of the syndicate’s allocation logic. Takeaway: Syndicate managers must provide written disclosure of all priority provisions and any subsequent amendments to all syndicate members before the commencement of the offering to ensure transparency in the allocation process.

Correct: Under MSRB Rule G-47, a broker, dealer, or municipal securities dealer is required to disclose to a customer, at or prior to the time of trade, all material information known about the transaction and the security, as well as material information about the security that is reasonably available from established industry sources. This ‘time of trade’ disclosure obligation is distinct from the requirement to deliver a final Official Statement and applies to both primary and secondary market transactions. Incorrect: Relying on ‘access equals delivery’ refers to the delivery of the final Official Statement under Rule G-32, but it does not satisfy the time-of-trade disclosure requirements for material facts. Delaying the trade until the final Official Statement is available is not a regulatory requirement, as disclosures can be made using the POS and other available data. While SMMPs have certain disclosure waivers, the dealer is still required to disclose material information that is not available from established industry sources, and the general obligation for time-of-trade disclosure remains a core protection that cannot be entirely bypassed by the bond purchase agreement alone. Takeaway: Dealers must disclose all material information to customers at or prior to the time of trade, independent of the delivery requirements for the final Official Statement.

Correct: Under SEC Rule 10b-5 and MSRB rules, dealers have a responsibility to ensure that investors have access to material information. If a preliminary official statement exists and is requested by a potential customer during the underwriting period, it must be provided. Antifraud provisions apply to all communications, and withholding a requested disclosure document that contains material facts could be interpreted as a deceptive practice or a failure to disclose material information necessary to make the statement not misleading. Incorrect: Waiting for the final statement is insufficient if a preliminary one is available and requested, as the preliminary document contains the material information available at that time. The sophisticated municipal market professional (SMMP) status reduces certain suitability obligations but does not waive the requirement to provide requested disclosure documents or the obligation to avoid material omissions under antifraud rules. A summary term sheet is not a legal substitute for a requested preliminary official statement when a customer specifically requests the full disclosure document. Takeaway: Municipal securities dealers must provide requested preliminary official statements to ensure compliance with antifraud provisions and the duty of fair dealing, regardless of the investor’s sophistication.

Correct: Under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which are applicable to municipal securities through MSRB Rule G-17, it is prohibited to employ any device, scheme, or artifice to defraud or to make any untrue statement of a material fact. In the context of municipal fund securities like 529 plans, using the term guaranteed in a headline without immediate, proximate clarification regarding the source of the guarantee and the lack of state or federal backing is considered a deceptive device. This is because a reasonable investor would likely interpret the headline as applying to the plan itself rather than a specific underlying contract. Professional standards require that the disclosure of the insurer’s role and the absence of government insurance be prominent enough to prevent the initial statement from being misleading. Incorrect: The approach of relying on a hyperlink to an official program disclosure booklet is insufficient because the antifraud provisions of the ’34 Act require that the communication itself not be misleading; a disclosure document cannot cure a deceptive advertisement after the fact. Providing the credit rating of the insurance company is a partial truth that fails to address the primary deception regarding the plan’s overall lack of government guarantee. Finally, the suggestion that investor sophistication mitigates the need for clear disclosure is incorrect, as the prohibitions against manipulative and deceptive devices apply to all market participants regardless of their experience level or existing relationship with the firm. Takeaway: Antifraud provisions under Rule 10b-5 and MSRB Rule G-17 require that all material facts be presented in a balanced manner within the communication itself to prevent it from being misleading, regardless of supplemental disclosures.

Correct: MSRB Rule G-12(f)(i) mandates that each transaction in municipal securities between brokers, dealers, or municipal securities dealers must be submitted for automated comparison if the transaction is eligible for comparison at a registered clearing agency and both parties (or their agents) are members of a clearing agency that provides comparison services. This ensures market efficiency and reduces the risk associated with manual trade matching. Incorrect: The suggestion that all trades must be compared regardless of membership status is incorrect because the rule specifically applies when both parties are members of a clearing agency. There is no regulatory par value threshold of 100,000 dollars that exempts smaller trades from automated comparison if they are otherwise eligible. Furthermore, the rule applies to both primary and secondary market transactions, not just primary distributions, provided the eligibility criteria are met. Takeaway: Mandatory automated comparison under MSRB Rule G-12(f) is contingent upon both the security’s eligibility and the clearing agency membership status of both counterparties.

Correct: Under MSRB Rule G-27, every broker, dealer, and municipal securities dealer must establish, maintain, and enforce written supervisory procedures (WSPs) to ensure compliance with MSRB rules and federal securities laws. For firms engaged in municipal fund securities business, such as 529 plans, the firm must designate a qualified Municipal Fund Securities Limited Principal (Series 51) or Municipal Securities Principal (Series 53) to oversee these activities. Furthermore, the rule mandates that WSPs be reviewed at least annually to ensure they remain effective and reasonably designed to achieve compliance in the current regulatory and operational environment. The procedures must also clearly identify the specific individual responsible for each supervisory function by name or title. Incorrect: Assigning oversight to a General Securities Principal or Chief Technology Officer is insufficient because MSRB rules specifically require a municipal-qualified principal (Series 51 or 53) for the supervision of municipal securities activities. Adopting a biennial (every two years) review cycle for WSPs fails to meet the regulatory minimum of an annual review required by MSRB Rule G-27. Relying on a general compliance manual that only addresses municipal securities when a conflict is identified is inadequate, as the firm must have specific, proactive procedures reasonably designed to ensure compliance with all applicable MSRB rules, including those related to data protection and disclosure. Takeaway: MSRB Rule G-27 requires an annual review of written supervisory procedures and the designation of a qualified municipal principal to oversee municipal fund securities activities.

Correct: Under MSRB Rule G-13, any quotation distributed by a dealer must be ‘bona fide,’ meaning it must be a firm bid or offer at the time it is made. Furthermore, the rule stipulates that the quotation must represent the dealer’s best judgment as to the fair market value of the securities, ensuring that the market is not misled by arbitrary or manipulative pricing. Incorrect: Requiring physical inventory is incorrect because dealers are permitted to make bona fide offers for securities they do not yet hold, provided they have a reasonable expectation of being able to settle the trade. Mandating that quotes remain firm for thirty minutes is not a regulatory requirement; quotes must be firm at the time they are made unless otherwise specified. Reporting quotations to RTRS is incorrect because RTRS is designed for the reporting of executed transactions, not for the dissemination of quotes. Takeaway: MSRB Rule G-13 requires all municipal security quotations to be bona fide and reflective of the dealer’s honest assessment of fair market value at the time of publication.

Correct: Under MSRB Rule G-9 (Preservation of Records), certain records must be maintained for a minimum of six years. These include blotters (records of original entry), general ledgers, and customer account records. Since the records in the scenario are only four years old, the firm must continue to maintain them for at least two more years to comply with the six-year requirement. Incorrect: Disposing of blotters after three years is incorrect because they are specifically categorized under the six-year retention requirement. Aligning with a four-year or five-year internal plan is insufficient because it falls short of the six-year regulatory mandate for these specific document types. While electronic storage is a permitted medium, the underlying data must still be preserved for the full six-year duration; the medium change does not permit the premature destruction of the required information. Takeaway: MSRB Rule G-9 requires that critical records such as blotters and customer account records be preserved for at least six years, regardless of internal storage optimization goals.

Correct: MSRB Rule G-23 creates a strict prohibition against a dealer acting as both a financial advisor and an underwriter for the same issue of municipal securities. This ‘bright-line’ rule applies regardless of whether the offering is conducted through a negotiated sale or a competitive bid. The rule is designed to prevent the inherent conflict of interest that arises when a firm responsible for advising the issuer on the terms of a sale also has a financial interest in purchasing those securities at the lowest possible price. Incorrect: The suggestion that competitive bids are an exception is based on outdated regulations; prior to 2011, such exceptions existed, but current rules prohibit this practice entirely for the same issue. Resigning as an advisor just before the bid or providing written waivers and disclosures does not satisfy the requirements of Rule G-23, as the conflict of interest is established at the time the advisory relationship for that specific issue begins. Furthermore, the prohibition cannot be bypassed simply by changing the fee structure or providing additional disclosures in the official statement. Takeaway: Under MSRB Rule G-23, a broker-dealer is strictly prohibited from serving as an underwriter on any municipal security issue for which it has provided financial advisory services.

Correct: Under MSRB Rule A-12(j), a broker, dealer, or municipal securities dealer that ceases to be engaged in municipal securities activities must file an update to Form A-12 to withdraw its registration. This withdrawal becomes effective immediately upon the MSRB’s receipt of the updated form. The firm remains subject to the jurisdiction of the MSRB for its conduct during the period it was registered, ensuring that firms cannot escape regulatory oversight for past actions by simply withdrawing. This process ensures that the MSRB’s records accurately reflect the active participants in the municipal securities market. Incorrect: The requirement for a 60-day advance notice is a feature of SEC Form BDW processing in certain contexts, but MSRB Rule A-12(j) explicitly states that withdrawal is effective upon receipt of the Form A-12 update. Waiting for the annual affirmation period in January is incorrect because firms are required to update Form A-12 whenever information becomes inaccurate, and ceasing municipal business is a material change that must be reported promptly rather than waiting for the annual cycle. While MSRB registration is linked to SEC and FINRA status, the MSRB requires a distinct filing on its own Gateway system; registration is not automatically terminated by the MSRB simply because a Form BDW was filed with other regulators. Takeaway: Withdrawal from MSRB registration is executed by filing an update to Form A-12 and is effective immediately upon receipt by the MSRB.

Correct: The Securities Investor Protection Corporation (SIPC) was established under the Securities Investor Protection Act of 1970 to protect customers of a broker-dealer that has failed or is in financial distress. SIPC provides coverage up to $500,000 per customer (in each separate capacity), of which no more than $250,000 can be for cash. It is critical to understand that SIPC does not protect against market risk, investment losses, or the default of a municipal issuer; it only addresses the loss of assets held at the insolvent firm. Incorrect: SIPC is not a federal government agency, but a non-profit membership corporation. It does not guarantee the value of securities or protect against issuer defaults; those are risks inherent to the investment itself. Furthermore, SIPC coverage is not unlimited; it is capped at $500,000 per customer. It is also not triggered by an issuer’s failure to pay interest, but rather by the financial failure of the broker-dealer holding the customer’s assets. Takeaway: SIPC protects investors against the loss of assets held at a failed broker-dealer up to $500,000, but it offers no protection against market fluctuations or issuer defaults.

Correct: According to MSRB Rule G-3, any person associated with a broker, dealer, or municipal securities dealer who is directly engaged in the management, direction, or supervision of municipal securities activities—such as underwriting, trading, sales, or training of representatives—must be qualified as a Municipal Securities Principal. The specific qualification for this role is the Series 53 examination. This ensures that the individual has the specialized knowledge required to oversee compliance with MSRB rules and the Securities Exchange Act of 1934. Incorrect: The General Securities Principal (Series 24) registration does not substitute for the Series 53 when the individual is specifically managing a municipal securities department. There is no ‘revenue percentage’ exemption for the principal qualification requirement. A Municipal Securities Representative (Series 52) is not authorized to perform supervisory or management functions. Finally, a Municipal Advisor (Series 50) is a distinct regulatory category for those providing advice to municipal entities; it does not cover the broker-dealer functions of underwriting and trading supervision. Takeaway: Any individual supervising a firm’s municipal securities business must be qualified as a Municipal Securities Principal through the Series 53 examination to ensure regulatory compliance.

Correct: Under MSRB Rule G-17 (Fair Dealing) and SEC Antifraud provisions (Rule 10b-5), a broker, dealer, or municipal securities dealer is required to disclose to its customer, at or prior to the time of trade, all material facts about the transaction known by the dealer, as well as material facts about the security that are reasonably accessible to the market. This includes information available through established industry sources such as the Electronic Municipal Market Access (EMMA) system. The obligation exists regardless of whether the trade is solicited or unsolicited. Incorrect: Providing information on a trade confirmation is insufficient because disclosure must occur at or before the ‘point of sale’ (the time of trade). Dealers have an affirmative duty to disclose material facts they know or that are publicly available on EMMA; they cannot shift this entire burden to the retail investor. The duty of disclosure applies to both primary and secondary market transactions, and the transition to a T+1 settlement cycle does not change the requirement that material disclosures must happen at or before the time the trade is executed. Takeaway: Dealers must affirmatively disclose all material facts to customers at or before the time of trade, even if that information is already publicly available on the EMMA system.

Correct: MSRB Rule G-27 (Supervision) requires that a dealer’s Written Supervisory Procedures (WSPs) be specific to the firm’s business and provide clear guidance on how the firm will comply with applicable rules, such as G-19 for account opening and suitability. When a deficiency is found in a specific area, the principal must first identify the gap between the firm’s current manual and the regulatory requirements to create procedures that define the ‘who, what, when, and how’ of supervision, ensuring that a designated principal is accountable for the review process and that the procedures are actionable for the firm’s specific business model. Incorrect: Conducting a retrospective review of accounts addresses potential past errors but does not fix the systemic failure of having inadequate written procedures as required by MSRB standards. Relying on general manuals or training without specific written procedures fails to meet the G-27 standard for tailored supervision, which requires specific topics like account opening to have their own detailed protocols. Automating controls is a valid risk management tool, but it cannot replace the regulatory requirement for a written supervisory framework that outlines the principal’s oversight responsibilities and the firm’s compliance strategy. Takeaway: Written Supervisory Procedures must be tailored to the firm’s specific business and provide clear, actionable instructions for the designated principal to ensure compliance with MSRB rules.

Correct: Under MSRB Rule G-17 (Fair Dealing) and interpretive guidance regarding the sale of municipal fund securities, dealers are required to disclose to non-resident investors that their home state may offer state tax or other benefits, such as matching grants, that are not available through an out-of-state plan. The primary risk in this scenario is that a non-resident investor might forgo significant financial benefits (like a matching contribution) in their home state because the firm failed to provide adequate disclosure. Mitigation requires a clear, prominent disclosure in the program description and marketing materials, as well as ensuring that registered representatives discuss the potential loss of home-state benefits with out-of-state prospects to meet suitability and fair dealing obligations. Incorrect: The approach of obtaining a legal guarantee for matching funds is incorrect because state-sponsored 529 plans are generally not guaranteed by the state’s full faith and credit, and a legal opinion would not resolve the disclosure failure regarding residency requirements. Focusing on the federal tax treatment of matching funds as the primary risk is a misunderstanding of the principal’s duty; while tax treatment is important, the immediate regulatory risk involves the suitability of the plan choice relative to the client’s residency. Implementing a tiered fee structure for non-residents to offset matching costs does not address the disclosure or suitability requirements and could potentially lead to further regulatory scrutiny regarding fair pricing and equitable treatment of investors. Takeaway: A Municipal Fund Securities Principal must ensure that all non-resident clients are explicitly informed that state-specific benefits, such as matching contributions, are typically restricted to residents and may be available in the client’s own home state.

Correct: According to MSRB Rule G-1 and Section 3(a)(30) of the Securities Exchange Act of 1934, a bank may be considered a municipal securities dealer if it conducts its municipal activities through a separately identifiable department or division (SID). The regulatory requirements for a SID mandate that the unit must be under the direct supervision of an officer designated by the bank’s board of directors to be responsible for the day-to-day conduct of municipal securities activities. Furthermore, the SID must maintain all records relating to municipal securities business in a manner that allows them to be separately identified and easily accessible for inspection by regulatory authorities, such as the FDIC, FRB, or OCC, depending on the bank’s primary regulator. Incorrect: The requirement to legally incorporate as a separate subsidiary describes the creation of a distinct legal entity (a broker-dealer subsidiary) rather than a SID, which is a functional division within the bank itself. While physical separation and distinct branding are often implemented to mitigate ‘dual-hatted’ employee risks and avoid client confusion regarding FDIC insurance, they are not the primary legal criteria for defining a SID under MSRB rules. Relying solely on the bank’s general Chief Compliance Officer for oversight is insufficient because the regulations specifically require the board of directors to formally designate a specific officer to be responsible for the municipal securities activities of the SID. Takeaway: To qualify as a Separately Identifiable Department (SID), a bank unit must have a board-designated supervising officer and maintain distinct, extractable records for its municipal securities activities.

Correct: According to MSRB Rule G-3(i), any registered person who fails to complete the Regulatory Element within the prescribed timeframes is considered ‘CE Inactive.’ While in this status, the individual is prohibited from performing any duties that require registration and cannot receive any compensation for such activities. The firm must immediately ensure the individuals cease all registered functions until the requirement is satisfied. Incorrect: Granting a grace period or allowing continued activity under heightened supervision is not permitted under MSRB rules once a person becomes CE Inactive. Extensions or waivers are rarely granted and do not allow for continued registered activity in the interim. Reclassifying representatives to non-registered status does not permit them to continue client meetings or underwriting activities that inherently require professional qualification and registration. Takeaway: Failure to complete the Regulatory Element of Continuing Education results in an immediate ‘CE Inactive’ status, prohibiting the individual from performing or being compensated for any registered functions until the deficiency is corrected.

Correct: MSRB Rule G-13 (Quotations) stipulates that no broker, dealer, or municipal securities dealer shall distribute or publish any quotation unless the quotation represents a bona fide bid for, or offer of, municipal securities. If a quotation is not ‘firm’—meaning it is for informational purposes only (nominal) or is subject to some condition (subject)—it must be clearly and specifically identified as such at the time the quotation is made. Incorrect: The suggestion that illiquid securities are exempt from labeling requirements is incorrect, as Rule G-13 applies to all municipal securities regardless of liquidity. The idea that a quote only becomes firm upon written acceptance by a principal is a misunderstanding of the ‘bona fide’ requirement, which applies at the moment of dissemination. Finally, using a third-party communication system does not absolve the firm of its responsibility to ensure its own published quotes are accurate and properly labeled. Takeaway: Under MSRB Rule G-13, all municipal security quotations must be bona fide and firm unless they are explicitly labeled as nominal or subject to change at the time of dissemination.

Correct: Under MSRB Rule G-14, while most municipal securities transactions must be reported to the Real-Time Transaction Reporting System (RTRS) within 15 minutes of execution, specific exceptions apply to primary market transactions. List Offering Price and Takedown transactions are required to be reported by the end of the day on which the trade occurred, rather than the standard 15-minute window. This distinction is crucial for compliance officers when investigating complaints related to trade transparency and reporting delays. Incorrect: The 15-minute reporting requirement is the general rule for secondary market transactions but does not apply to List Offering Price transactions. A one-hour reporting window is not a recognized timeframe under MSRB Rule G-14 for any standard transaction type. Reporting by the end of the next business day is only applicable if the trade occurs after the RTRS system has closed for the day (after 6:30 PM ET), but it is not the primary regulatory deadline for trades occurring during normal business hours. Takeaway: List Offering Price transactions are exempt from the standard 15-minute RTRS reporting requirement and must instead be reported by the end of the trade day.

Correct: Under MSRB Rule G-27 and related suitability and recordkeeping rules, the specific supervisory procedure for opening accounts requires a designated municipal securities principal to approve the account in writing. This approval signifies that the principal has ensured the firm obtained all ‘essential facts’ (KYC) necessary to service the account and comply with regulatory requirements, which is a more granular and immediate obligation than general firm-wide oversight. Incorrect: General compliance officers may perform audits, but the specific duty of account approval is reserved for the municipal securities principal. Self-certification by registered representatives is insufficient as it lacks the required supervisory oversight. Relying on an annual audit is a reactive measure and does not satisfy the requirement for proactive, specific supervisory procedures regarding the opening of each individual account. Takeaway: Specific supervisory procedures for account opening require a designated principal to provide documented approval and verify that all necessary customer information has been collected.

Correct: Under MSRB Rule G-22, a control relationship exists when a dealer controls, is controlled by, or is under common control with the issuer of a municipal security. In such instances, the dealer must provide oral disclosure of the relationship to the customer at or before the time of trade (the point of sale) and written disclosure at or before the completion of the transaction (typically on the confirmation). Furthermore, for accounts where the dealer exercises discretionary authority, the rule strictly prohibits executing a transaction in a security where a control relationship exists unless the dealer has obtained specific written authorization from the customer for that particular transaction. Incorrect: Providing disclosure only on the trade confirmation or within the official statement is insufficient because it misses the mandatory oral disclosure required at the point of sale. Relying on a general conflict of interest waiver or a one-time relationship disclosure at the start of the client engagement fails to meet the transaction-specific requirements for discretionary accounts. While some firms may have internal policies against recommending affiliated securities, MSRB rules do not categorically prohibit such recommendations; rather, they mandate rigorous disclosure and client consent protocols to mitigate the conflict. Takeaway: Control relationships in municipal securities require both oral and written disclosure to the client, plus specific written authorization for any trades executed in discretionary accounts.

Correct: Under MSRB Rule G-8, municipal securities dealers are required to maintain records of all transactions. For every order received (whether principal or agency), the firm must record the time of receipt, the time of execution, and the identity of the person who entered the order. These records are essential for demonstrating that the firm handled the order fairly and for providing an audit trail for regulatory examinations. Incorrect: Focusing only on agency transactions is incorrect because MSRB rules do not exempt principal trades from time-of-receipt requirements. Implementing different retention periods based on capital risk is incorrect as MSRB Rule G-9 sets specific retention standards (generally three years for order tickets) regardless of the firm’s capacity. Distinguishing between retail and institutional orders for the purpose of recording receipt times is a violation of record-keeping standards, as all orders must be documented with the same level of detail to ensure market integrity. Takeaway: MSRB rules require uniform and detailed record-keeping for both principal and agency transactions, including the precise timing of order receipt and execution to ensure a complete audit trail of all municipal securities activity.

Correct: Under MSRB Rule G-27, a municipal securities dealer is required to supervise all of its municipal securities activities, and this responsibility is non-delegable. While a firm may outsource the performance of specific operational or administrative tasks to a third party, the firm and its designated Municipal Fund Securities Limited Principal retain the ultimate legal and regulatory responsibility for ensuring those activities comply with all applicable MSRB rules. To satisfy this obligation, the firm must incorporate the outsourced functions into its own Written Supervisory Procedures (WSPs), conduct rigorous initial and ongoing due diligence on the vendor, and implement a system of independent testing to verify that the vendor’s controls are functioning effectively and in accordance with the firm’s standards. Incorrect: The approach of delegating supervisory authority through a Service Level Agreement is incorrect because regulatory obligations for supervision cannot be transferred to a third party regardless of the contract terms. Relying solely on a vendor’s monthly attestations or SOC reports is insufficient as it fails to meet the requirement for active oversight and independent verification of compliance with municipal securities regulations. Appointing a vendor’s employee as a co-principal is not a recognized regulatory method for satisfying supervisory requirements and does not relieve the firm’s own principals of their primary duty to oversee the firm’s business activities. Takeaway: A municipal securities dealer may outsource the execution of functional tasks but retains the non-delegable responsibility for the supervision of those activities under MSRB Rule G-27.

Correct: MSRB Rule G-32 requires that underwriters of primary offerings, including municipal fund securities like 529 plans, submit the official statement to the Electronic Municipal Market Access (EMMA) system. This submission must occur by the end of one business day after receipt from the issuer, but in no event later than the settlement date. This is a strict procedural requirement designed to ensure that the primary market disclosure is available to the public and investors in a timely manner. While the firm must also ensure the document is accurate to satisfy antifraud provisions, internal legal reviews or pending conflict-of-interest assessments do not grant an extension or exemption from the specific filing deadlines mandated by the MSRB. Incorrect: Delaying the submission until a legal opinion is finalized fails to meet the mandatory deadlines of Rule G-32, which are not contingent upon internal firm approvals. While accuracy is required under the Securities Exchange Act of 1934, it does not waive the procedural requirement to file the document once it has been received from the issuer. Submitting a preliminary official statement as a placeholder is insufficient because the rule specifically requires the final official statement to be filed to complete the primary market disclosure process. Requesting a hardship waiver is inappropriate in this context, as such waivers are intended for technical system failures or natural disasters, not for internal administrative or legal delays within the control of the broker-dealer. Takeaway: Underwriters must submit the final official statement to EMMA within one business day of receipt and no later than the settlement date, regardless of internal legal or administrative delays.