Series 82 Private Securities Offerings Representative Exam

Correct: Under MSRB Rule G-42, a municipal advisor owes a fiduciary duty to its municipal entity client, which includes a duty of care and a duty of loyalty. When there is a gap in purchasers or a decline in the creditworthiness of a guarantor for variable rate demand obligations (VRDOs), the advisor must provide professional advice that serves the client’s best interests. This involves analyzing the financial impact of the current situation and presenting viable alternatives, such as replacing the guarantor or restructuring the debt, to mitigate the risk of failed remarketings and increased interest costs. Incorrect: Setting the interest rate at the maximum cap would significantly increase the issuer’s borrowing costs and does not address the underlying credit or liquidity issue. Maintaining the status quo when a guarantor is failing ignores the advisor’s duty of care and exposes the issuer to the risk of a ‘bank bond’ rate or mandatory redemption. While finding a better guarantor is a good goal, a municipal advisor cannot unilaterally negotiate or bind the issuer to a contract; they must provide advice and allow the issuer to make the final decision. Takeaway: A municipal advisor’s fiduciary duty requires proactive analysis and objective advice when credit enhancements or liquidity providers for variable rate obligations no longer meet the issuer’s needs or market requirements.

Correct: Under MSRB Rule G-42, municipal advisors owe a fiduciary duty to their municipal entity clients, which includes a duty of care. This duty requires the advisor to possess the knowledge and expertise needed to provide informed advice and to perform the necessary research to have a reasonable basis for any recommendation. When structuring a financing plan, the advisor must explain the risks, benefits, and alternatives of a particular structure (like a balloon payment) so the client can make an informed decision in their own best interest. Incorrect: Relying solely on client instructions without analysis is incorrect because the fiduciary duty of care requires the advisor to provide professional judgment and potentially caution the client against risky structures. Documenting only the legal approval is insufficient because the advisor’s duty is separate from legal counsel and focuses on the financial suitability and risks of the structure. Limiting analysis to current market conditions is incorrect because a municipal advisor must consider the long-term implications of a financing structure, including the risks of future market access for refinancing balloon payments. Takeaway: MSRB Rule G-42 requires municipal advisors to provide a comprehensive analysis of the risks and alternatives of a recommended financing structure to fulfill their fiduciary duty of care.

Correct: Under SEC Rule 15B and MSRB Rule D-13, the underwriter exclusion from the definition of a municipal advisor is limited in scope. It only applies once a broker-dealer has been engaged to act as an underwriter for a specific issue of municipal securities. Advice provided during the ‘pre-engagement’ phase—such as recommendations on the structure, timing, or terms of an issue before being hired as the underwriter—is considered municipal advisory activity and requires the firm to be registered as a municipal advisor. Incorrect: The underwriter exclusion does not apply retroactively; advice given before formal engagement is not protected simply because the firm eventually underwrites the deal. Membership in FINRA or the MSRB does not grant a blanket exemption from municipal advisor registration when performing advisory functions. While investment banking involves many activities, the specific act of providing advice on the structure of municipal securities to an issuer is regulated as municipal advisory activity unless a specific exclusion, like the underwriter exclusion, is currently in effect. Takeaway: The underwriter exclusion from municipal advisor registration only applies after a firm is formally engaged for a specific issuance and does not cover advice provided during the pre-engagement period.

Correct: Under federal tax law, the yield on investments in a refunding escrow is generally restricted to the yield on the refunding bonds to prevent illegal arbitrage. An independent verification report from a specialized firm (such as a certified public accountant) provides the necessary assurance that the cash flows from the escrow securities are sufficient to meet debt service and that the yield remains within regulatory limits, thereby protecting the tax-exempt status of the issue. Incorrect: Investing in high-yield corporate debt is inappropriate for a refunding escrow because these accounts typically require high-quality government securities to ensure safety and liquidity, and exceeding the bond yield would violate arbitrage restrictions. Relying on SLGS without evaluating open market securities may fail the municipal advisor’s fiduciary duty to seek the most cost-effective solution for the client. Relying solely on an underwriter’s certificate is insufficient as the municipal advisor has an independent fiduciary duty to perform due diligence and act in the issuer’s best interest. Takeaway: Independent verification of escrow yields is a critical control to ensure compliance with federal arbitrage regulations and to protect the tax-exempt status of municipal bonds during a refunding transaction.

Correct: Under MSRB Rule G-9, municipal advisors are required to preserve the records specified in Rule G-8 for a period of at least five years. The rule further specifies that for the first two years, these records must be maintained in an easily accessible place. This requirement is a standard across the industry for municipal advisory activities and does not provide exceptions based on the size of the issuer or the specific nature of the debt service funding advice. Incorrect: The suggestion of a three-year period is incorrect because it fails to meet the five-year minimum mandated by MSRB Rule G-9. A six-year retention period is required for certain records maintained by municipal securities dealers, such as blotters and customer account records, but it is not the standard for municipal advisor records. A four-year period is not recognized by the MSRB as a standard retention timeframe for these specific advisory documents, regardless of the storage format used. Takeaway: MSRB Rule G-9 requires municipal advisors to maintain records of their advisory activities for at least five years, with the first two years being easily accessible.

Correct: MSRB Rule G-8(a)(xii) specifically requires that for every written complaint of a customer, the firm must maintain a record that includes the complainant’s name, address, the date the complaint was received, and a record of what action, if any, was taken by the broker, dealer, or municipal securities dealer. This ensures a clear audit trail of how the firm handles grievances. Incorrect: The requirement for verbal complaints is not mandated under Rule G-8’s specific complaint recordkeeping provision, which focuses on written communications. Simply archiving emails without a structured record of the action taken does not meet the specific requirements of the rule. Furthermore, the rule applies to all written complaints regarding the municipal securities activities of the firm, not just those involving fraud or specific financial thresholds. Takeaway: Rule G-8 requires a structured record of all written customer complaints, including the complainant’s details and the firm’s resolution efforts, to ensure regulatory transparency.

Correct: According to IRS rules, the de minimis rule sets a threshold for determining if a discount is ‘small’ or ‘substantial.’ If the discount is equal to or greater than 0.25% of the par value multiplied by the number of full years to maturity, the discount is considered substantial and is taxed as ordinary income rather than a capital gain. This is a critical distinction for municipal advisors to communicate as it significantly impacts the after-tax yield for investors. Incorrect: Option B is incorrect because Bank Qualified status relates to the ability of commercial banks to deduct interest expenses, not the tax treatment of market discounts. Option C is incorrect because the tax treatment (ordinary income vs. capital gain) depends specifically on the size of the discount relative to the de minimis threshold. Option D is incorrect because the de minimis rule applies specifically to tax-exempt municipal bonds to determine the tax character of the market discount. Takeaway: The de minimis rule triggers ordinary income tax treatment on secondary market discounts if the discount exceeds 0.25% per full year to maturity.

Correct: Revenue bonds are issued to fund specific projects and are backed by the revenues generated by those projects, such as tolls or user fees. Because they are not backed by the full faith and credit (taxing power) of the issuer, they are typically not subject to statutory or constitutional debt limits and do not require voter approval, making them the most suitable choice for an issuer nearing its debt ceiling. Incorrect: Limited tax general obligation bonds are backed by property taxes up to a certain millage rate and generally count toward the municipality’s debt limit. Unlimited tax general obligation bonds are backed by the full taxing power of the issuer, require voter approval, and are subject to debt limits. Special tax bonds are backed by specific non-ad valorem taxes (like gasoline or tobacco taxes) rather than the project’s own revenue; while they might bypass some limits, a revenue bond is the more direct and standard application for a self-sustaining toll project. Takeaway: Revenue bonds allow municipalities to finance self-supporting infrastructure projects without impacting statutory debt limits or requiring general tax increases.

Correct: Under MSRB Rule G-8 and the fiduciary duty standards established by the Dodd-Frank Act, municipal advisors must maintain records of the advice provided and have a reasonable basis for their recommendations. This includes a duty of care to perform adequate due diligence. Documenting the specific information from news services that influenced a recommendation ensures the advisor can demonstrate that their advice was well-founded and that they met their professional obligations. Incorrect: Physical centralization of terminals is a logistical measure that does not address the regulatory requirement for recordkeeping or the qualitative assessment of advice. Prohibiting real-time news is not a regulatory requirement and would likely hinder the advisor’s ability to provide relevant, timely advice to their client. Fiduciary duties cannot be waived through client acknowledgments, and advisors remain responsible for the due diligence performed on the information they use to provide advice. Takeaway: Municipal advisors must document and validate the external information used to support their recommendations to satisfy both recordkeeping rules and their fiduciary duty of care.

Correct: Under MSRB Rule G-42, a municipal advisor owes a fiduciary duty to its municipal entity clients, which includes a duty of loyalty and a duty of care. Recommending that the conduit borrower’s counsel also represent the issuer creates a potential conflict of interest because the interests of the borrower and the issuer are not always aligned, particularly regarding bond covenants and indemnification. The municipal advisor must act in the best interest of the municipal entity without regard to other interests, such as the borrower’s desire to save on legal fees. Incorrect: MSRB Rule G-34 pertains to CUSIP numbers and price transparency, not the approval of legal counsel roles. The 2% cost of issuance limit is a federal tax law provision for qualified private activity bonds and does not govern the ethical or fiduciary obligations of a municipal advisor regarding legal representation. Most importantly, a municipal advisor’s fiduciary duty is owed to the municipal entity (the issuer), not the conduit borrower, even if the borrower is paying the advisor’s fees. Takeaway: Municipal advisors must ensure that their recommendations do not compromise the municipal entity’s access to independent legal counsel, as required by their fiduciary duty.

Correct: Under MSRB Rule G-42, municipal advisors owe a fiduciary duty to their municipal entity clients, which includes a duty of care and a duty of loyalty. When recommending a complex financial product or a hedge like an interest rate swap, the advisor must provide a thorough review of the risks. This includes basis risk, which is the risk that the floating rate index received from the swap (LIBOR) does not perfectly match the floating rate paid on the bonds (SIFMA), potentially leaving the issuer with higher-than-expected net costs. Incorrect: Focusing on a specific historical correlation threshold is a technical analysis but does not fulfill the regulatory requirement for comprehensive risk disclosure and suitability. Suggesting a delay to eliminate all risk is often impractical and does not address the advisor’s duty to evaluate the specific strategy proposed by the client. Proposing a contractual adjustment clause is a potential mitigation tactic but does not satisfy the advisor’s primary regulatory obligation to provide a written assessment of the risks inherent in the transaction. Takeaway: Municipal advisors must provide written disclosures regarding the risks of hedging strategies, specifically addressing basis risk when the hedge index differs from the debt index.

Correct: Rule 3a4-1 of the Securities Exchange Act of 1934 provides a safe harbor from broker-dealer registration for associated persons of an issuer, such as officers or directors, provided they meet specific criteria. The most fundamental requirement across all prongs of the safe harbor is that the person must not receive transaction-based compensation. If the individual’s remuneration is tied to the success, size, or closing of the securities offering, they are effectively acting as a broker and the safe harbor is invalidated. By ensuring compensation is based on fixed salary or general corporate performance metrics, the issuer prevents the individual from having a ‘salesman’s stake’ in the offering, which is the primary trigger for registration requirements. Incorrect: Restricting involvement to purely ministerial tasks is one way to qualify for the safe harbor, but it is not the most critical measure in this scenario because the individual intends to actively solicit investors, which is permitted under the ‘substantial duties’ prong if compensation is handled correctly. Mandating registration as a limited representative is incorrect because the 3a4-1 safe harbor is specifically designed to provide an exemption for those who are NOT registered; if they register, they are by definition acting as a broker. Limiting activities to a 30-day window is a misunderstanding of the rule; the actual requirement is that the person must not have participated in a securities offering in the preceding 12 months and must not participate more than once every 12 months, but there is no specific 30-day limitation on the solicitation period itself. Takeaway: The 3a4-1 safe harbor strictly prohibits transaction-based compensation for associated persons of an issuer to ensure they are not deemed unregistered brokers.

Correct: MSRB Rule G-33 specifies that for the purpose of calculating accrued interest on municipal securities (excluding municipal notes), the 30/360 day count convention must be used. This convention simplifies calculations by assuming each month has 30 days and each year has 360 days, providing a uniform standard for the municipal market. Incorrect: The Actual/Actual convention is the standard for U.S. Treasury bonds, not municipal bonds. The Actual/360 convention is typically used for money market instruments and certain commercial loans. The 30/365 convention is a hybrid used in some corporate or international contexts but does not meet the MSRB regulatory requirements for municipal bond interest calculations. Takeaway: Municipal bonds utilize the 30/360 day count convention for accrued interest calculations to ensure regulatory consistency and industry-wide uniformity.

Correct: Under MSRB Rule G-42, a municipal advisor owes a fiduciary duty to their municipal entity client, which includes a duty of care and a duty of loyalty. When dealing with bond proceeds like reserve funds or construction funds, the advisor must ensure that any reallocation complies with the legal framework established in the bond documents (indenture) and federal tax law, specifically arbitrage and rebate rules. Verifying these constraints and documenting the advice is essential to fulfilling the duty of care and complying with recordkeeping requirements under MSRB Rule G-8. Incorrect: Directing a transfer without verifying legal and tax compliance fails the duty of care because it could jeopardize the tax-exempt status of the bonds. Recommending a principal paydown without legal consultation ignores the specific covenants and redemption provisions that may apply to the bonds. Suggesting the client hold funds in a non-interest-bearing account indefinitely may not be in the client’s best interest and ignores the advisor’s responsibility to provide informed advice on the efficient use of proceeds within regulatory limits. Takeaway: A municipal advisor must ensure that the management and reallocation of bond proceeds strictly adhere to the bond indenture and tax regulations to fulfill their fiduciary duty of care.

Correct: Under MSRB Rule G-42, municipal advisors owe a fiduciary duty to their municipal entity clients, which includes a duty of care and a duty of loyalty. This requires the advisor to provide professional advice that is in the client’s best interest. Clearly defining technical defaults and remediation timelines in the engagement letter ensures the issuer is fully informed of their obligations and the consequences of non-compliance, thereby protecting the issuer’s financial health and credit reputation. Incorrect: Verbal discussions are insufficient as MSRB Rule G-42 requires the terms of the municipal advisory relationship to be documented in writing. Delegating the responsibility entirely to the underwriter’s counsel is inappropriate because the underwriter’s interests may conflict with the issuer’s, and the advisor has an independent fiduciary duty. Excluding default provisions from the scope of the agreement is incorrect because advising on the terms and structure of a municipal issuance, including its protective covenants and remedies, is a core municipal advisory activity. Takeaway: Fiduciary duty requires municipal advisors to document clear default and remedy provisions in writing to ensure the issuer’s interests are protected throughout the life of the debt obligation.

Correct: Evaluating municipal supply primarily involves analyzing the ‘visible supply,’ which is the total dollar amount of new municipal bonds expected to be offered within the next 30 days. By combining this with the placement ratio (the percentage of new issues sold in the previous week), a municipal advisor can gauge market saturation and investor demand. This analysis is a critical component of the advisor’s fiduciary duty under MSRB Rule G-42, as it helps the issuer determine the optimal timing for a sale to minimize interest costs. Incorrect: Focusing on local retail holdings is insufficient because the municipal market is driven largely by institutional investors and national supply trends. Internal debt limits are a matter of legal capacity and compliance rather than a measure of market supply or demand dynamics. While underwriting fees are a cost of issuance, they do not provide information regarding the volume of competing securities in the primary market or the likelihood of the market absorbing a new issue. Takeaway: Effective evaluation of municipal supply requires monitoring the 30-day visible supply and market absorption rates to optimize issuance timing and fulfill fiduciary obligations to the client.

Correct: MSRB Rule G-20 limits gifts and gratuities to $100 per person per year. However, there is an exclusion for ‘normal business entertainment,’ such as meals or tickets to theatrical or sporting events. For this exclusion to apply, the entertainment must be occasional, not so frequent or extensive as to raise questions of propriety, and a representative of the municipal advisor must be present at the event. Because the representative is attending, the $350 cost is evaluated as business entertainment rather than a gift subject to the $100 hard cap. Incorrect: The $100 limit mentioned in one option applies specifically to gifts where the donor is not present; business entertainment where the host attends is governed by the standard of reasonableness and frequency. The suggestion regarding Form G-37 is incorrect because that form is used for disclosing political contributions, not business entertainment expenses. The claim regarding a six-month prohibition under the Dodd-Frank Act is a fabrication, as the Act and subsequent MSRB rules focus on fiduciary duty and fair dealing rather than a specific time-based blackout for reasonable entertainment. Takeaway: Under MSRB Rule G-20, business entertainment is excluded from the $100 gift limit if it is reasonable, occasional, and hosted by the municipal advisor’s personnel.

Correct: Under MSRB Rule G-42, a municipal advisor owes a fiduciary duty to their municipal entity client, which includes a duty of care and a duty of loyalty. This requires the advisor to evaluate all reasonable alternatives for funding a project. Comparing the cost of capital, the impact on the city’s credit profile, and the specific requirements of grants or SRF loans (Clean Water) ensures the advisor is acting in the client’s best interest by optimizing the funding mix and minimizing unnecessary debt service. Incorrect: Prioritizing bond banks solely to reduce the advisor’s administrative burden fails the duty of loyalty and care. Deferring a project until it is fully funded by appropriations may not be feasible for critical infrastructure and ignores the benefits of subsidized financing like SRF. Maximizing debt capacity before exploring grants or PAYGO funding often results in higher interest costs for the municipality, which contradicts the advisor’s obligation to seek the most beneficial financial outcome for the client. Takeaway: A municipal advisor’s fiduciary duty requires a thorough comparative analysis of all available funding sources, including non-debt options like grants and PAYGO, to ensure the most cost-effective solution for the client.

Correct: Under the Tax Equity and Fiscal Responsibility Act (TEFRA), qualified private activity bonds must satisfy the public approval requirement to be tax-exempt. This process requires that the bonds be approved by an elected official or legislative body of the issuing jurisdiction following a public hearing for which reasonable public notice was provided. Incorrect: Form 8038-G is used for governmental bonds, whereas private activity bonds require Form 8038. The private business use limit for tax-exempt status is generally 10%, not 25%, and exceeding this limit triggers the private activity bond classification rather than a safe harbor. While a private letter ruling can provide certainty, it is not a standard procedural requirement for issuing private activity bonds under TEFRA. Takeaway: Qualified private activity bonds require a TEFRA hearing and approval by an elected official to maintain their tax-exempt status when private use exceeds the 10% threshold.

Correct: Under MSRB Rule G-9 (Preservation of Records), records required by Rule G-8(a)(xi), which include customer account information and suitability records, must be preserved for at least six years. Municipal fund securities, including LGIPs and 529 College Savings Plans, are defined as municipal securities and are therefore subject to these specific record-keeping and preservation requirements. Incorrect: The suggestion that records only need to be kept for three years is incorrect because while some records (like advertisements) have a three-year retention period, customer account and suitability records for municipal securities require six years. The claim that the state treasurer’s office holds the sole burden is incorrect because any dealer or municipal advisor involved in the transaction must maintain their own records to comply with MSRB rules. The idea that records can be purged one year after account closure is incorrect as it violates the fixed multi-year retention periods established by Rule G-9. Takeaway: Municipal fund securities such as LGIPs and 529 plans are subject to MSRB record-keeping rules, requiring the preservation of customer account and suitability records for at least six years.

Correct: MSRB Rule G-22 (Control Relationships) explicitly states that a broker, dealer, or municipal securities dealer cannot effect a transaction in a municipal security for a customer if a control relationship exists unless the dealer discloses the relationship to the customer. This disclosure must occur before the transaction (at the time of recommendation or trade discussion). If the initial disclosure is oral, the dealer must also provide a written disclosure at or before the completion of the transaction (typically on the trade confirmation). Incorrect: Option B is incorrect because the duty to disclose a control relationship is proactive and mandatory, not contingent upon a customer’s request. Option C is incorrect because disclosure must happen before the transaction, and a post-settlement document does not satisfy the timing requirements of Rule G-22. Option D is incorrect because the capacity in which the dealer acts (agency vs. principal) and the reasonableness of the commission do not exempt the dealer from the fundamental requirement to disclose a conflict of interest arising from a control relationship. Takeaway: MSRB Rule G-22 requires mandatory disclosure of control relationships to customers before a transaction, followed by written confirmation at or before the completion of the trade.

Correct: MSRB Rule G-28 dictates that when a dealer (the executing dealer) opens a municipal securities account for an employee of another dealer (the employer dealer), the executing dealer must provide written notice to the employer dealer. This rule specifically includes municipal fund securities, such as 529 plans. Additionally, the executing dealer must provide copies of confirmations or other account information if the employer dealer requests such documentation in writing. This ensures the employer dealer can maintain proper oversight of its employees’ outside securities activities. Incorrect: Option B is incorrect because an employee waiver does not supersede the regulatory requirement to notify the employer dealer under Rule G-28. Option C is incorrect because the rule does not establish a de minimis dollar threshold for the notification requirement; it applies to the opening of the account regardless of the investment amount. Option D is incorrect because 529 plans are not exempt from these rules, and the MSRB does not provide individual waivers for standard account opening procedures based on the type of municipal security. Takeaway: MSRB Rule G-28 requires executing dealers to provide written notice to an employer dealer when opening any municipal securities account, including 529 plans, for that dealer’s employees.

Correct: Under MSRB Rule G-17, brokers, dealers, and municipal securities dealers must deal fairly with all persons and must not engage in any deceptive, dishonest, or unfair practice. While Rule G-20 (Gifts and Gratuities) generally allows for business entertainment that is not so frequent or expensive as to raise a suggestion of impropriety, excessive or undocumented entertainment of a municipal official can be interpreted as an attempt to influence the official’s judgment. This undermines investor protection by potentially compromising the selection of fund managers or the terms of the municipal fund security based on improper incentives rather than the best interests of the investors. Incorrect: The $100 limit in Rule G-20 applies to gifts, but ‘normal business dealings’ such as meals and entertainment are generally excluded from this specific dollar limit provided the host is present; however, they are still subject to the overarching fair dealing standards. There is no regulatory requirement to register municipal officials as associated persons based on the receipt of entertainment. The Securities Investor Protection Corporation (SIPC) provides limited coverage for customers’ cached and securities in the event of a broker-dealer’s insolvency and does not have a role in monitoring or receiving disclosures regarding business entertainment expenses. Takeaway: Investor protection in municipal fund securities is maintained by preventing improper influence through excessive entertainment, ensuring that all dealings with municipal officials adhere to high standards of commercial honor and fair dealing.

Correct: Under MSRB Rule G-32, brokers, dealers, and municipal securities dealers are required to deliver the official statement (or a notice of its availability) to a customer for a new issue of municipal securities, including municipal fund securities like 529 plans, no later than the settlement of the transaction. This ensures that the investor has access to essential information regarding the risks and features of the security by the time the transaction is finalized. Incorrect: Providing the statement within three business days of the trade date is incorrect because the regulatory deadline is specifically tied to the settlement date. While providing materials at the time of solicitation is a recommended practice for transparency, it is not the specific deadline mandated for the official statement under Rule G-32. A 30-day window after account opening is far too long and would fail to meet the investor protection requirements established by the MSRB for timely disclosure. Takeaway: MSRB Rule G-32 mandates that the official statement for municipal fund securities must be delivered to the customer by the settlement date of the transaction.

Correct: MSRB Rule G-27 requires each dealer to establish, maintain, and enforce a system to supervise the municipal securities activities of its associated persons. This system must include written supervisory procedures (WSPs) that designate a municipal securities principal (specifically a Series 51 for municipal fund securities) responsible for supervision. The rule requires the review of correspondence and internal communications, which can be conducted using a risk-based approach, provided the procedures are clearly documented and the responsible principal is identified in the WSPs. Incorrect: Delegating final authority to a General Securities Principal is incorrect because municipal fund securities require a Series 51 or Series 53 principal for specific oversight. Limiting reviews only to complaints fails the requirement for regular, proactive supervision of communications under Rule G-27. Requiring physical processing at a main office does not exempt the firm from supervising the communications and sales practices of representatives working remotely, nor does it satisfy the requirement to have robust WSPs for all business activities regardless of location. Takeaway: A Series 51 principal must ensure that Written Supervisory Procedures include risk-based reviews of electronic communications and clearly designate the specific principal responsible for overseeing municipal fund securities activities.

Correct: Under Section 529 of the Internal Revenue Code, which governs the tax-advantaged status of municipal fund securities, a participant’s interest in a 529 plan may not be used as security for a loan. Additionally, the code stipulates that a contributor or beneficiary may only direct the investment of contributions (and earnings) no more than two times per calendar year, or upon a change in the designated beneficiary of the account. Incorrect: The prohibition against using a 529 plan as collateral for a loan is absolute under federal tax law and does not depend on the purpose of the loan or internal firm approvals. Furthermore, the limitation on investment direction is a statutory requirement of the Internal Revenue Code (twice per calendar year), not a matter of program-specific disclosure or MSRB-mandated cooling-off periods. Takeaway: Section 529 plans strictly prohibit the use of account assets as loan collateral and limit investment reallocations to twice per calendar year per account.

Correct: A mandatory pre-clearance process is the most effective safeguard because it is proactive. Under MSRB Rule G-37, a single improper contribution by an MFP can trigger an immediate two-year ban on municipal securities business with that issuer. Pre-clearance allows the firm to confirm that the MFP is entitled to vote for the candidate and that the contribution does not exceed the $250 de minimis exception, thereby preventing a violation before it occurs. Incorrect: Quarterly self-certification is reactive and occurs after a potentially disqualifying contribution has already been made, which would not prevent a business ban. Focusing only on corporate or PAC accounts is insufficient because Rule G-37 specifically covers contributions made by individual MFPs. A six-month look-back review is also reactive and fails to address the immediate impact of a contribution on the firm’s ability to conduct municipal securities business. Takeaway: Proactive pre-clearance of political contributions is the primary mechanism for preventing inadvertent violations of MSRB Rule G-37 and avoiding the resulting two-year ban on municipal securities business.

Correct: Under MSRB Rule G-20, the $100 annual gift limit applies to gifts of service or items given to any person in relation to the municipal securities activities of the employer of the recipient. However, ‘normal business entertainment’ (such as meals or tickets to events) is generally excluded from this $100 limit, provided that the entertainment is not so frequent or extensive as to raise a question of propriety and that the donor (the firm representative) is present. The Municipal Fund Securities Limited Principal is responsible for supervising these activities and ensuring that the firm maintains records of all such gifts and entertainment. Incorrect: Prohibiting all entertainment is a restrictive internal policy but is not a regulatory requirement under MSRB rules. Aggregating entertainment expenses into the $100 gift limit is a misunderstanding of Rule G-20, as legitimate business entertainment where the host is present is exempt from the numerical limit. Delegating oversight to a non-registered marketing department or using an aggregate $1,000 entity limit fails to meet the specific supervisory requirements of a municipal fund securities principal and ignores the per-person nature of the gift rule. Takeaway: A Municipal Fund Securities Limited Principal must distinguish between the $100 annual gift limit and the broader standards for reasonable business entertainment where a firm representative is present.

Correct: Under MSRB Rule G-8 and G-27, a municipal securities dealer is permitted to use a transfer agent to maintain records for municipal fund securities. However, the dealer remains legally responsible for ensuring that these records are maintained in accordance with MSRB rules. A written agreement that clarifies the dealer’s oversight role and guarantees that records are readily available for inspection by the SEC, FINRA, or other enforcement agencies is a critical component of a compliant supervisory system. Incorrect: Relying solely on a third-party audit report is insufficient because the dealer cannot delegate its ultimate regulatory accountability to a service provider. Maintaining only aggregate data or allowing the transfer agent to be the sole repository without dealer oversight fails to meet the requirement that the dealer’s records must be complete and accessible. Archiving records based on transaction size or in a non-indexed format violates the preservation requirements of MSRB Rule G-9, which requires records to be organized and accessible for the duration of the retention period. Takeaway: A municipal fund securities dealer retains ultimate responsibility for recordkeeping compliance even when outsourcing the maintenance of participant records to a third-party transfer agent.