Municipal Securities Sales Practices and Due Diligence Obligations
Brokers, dealers and municipal securities dealers (dealers) must fully understand
the municipal securities they sell in order to meet their disclosure, suitability
and pricing obligations under the rules of the Municipal Securities Rulemaking Board
(MSRB) and federal securities laws (see
FINRA NTM 10-41). Each firm has their own written policies and procedures
that pertain to Municipal Securities and it is important that you understand and
adhere to them.
Recently, FINRA reminded firms of their sales practice and due diligence obligations
when selling municipal securities in the secondary market (see
FINRA NTM 10-41). AAM has created the Municipal Disclosure Notification
email system to provide comprehensive factual information on Municipal Securities
being purchased, which may assist you in meeting your sales practice and due diligence
Note that AAM does not represent that this document alone will meet your sales practice
and due diligence obligations. Nor do we feel that simply forwarding the Municipal
Disclosure Notification email to a client will meet your obligations either. It
is up to each rep or advisor to understand their own firm's policies and procedures
and carry them out accordingly.
Answering the following questions (which were taken directly from
FINRA NTM 10-41) and discussing them with your client may help you in meeting
your Municipal securities sales practice and due diligence obligations:
Questions to Consider
Before selling any municipal security, dealers should make sure that they fully
understand the security they are selling in order to make adequate disclosure to
customers under MSRB Rule G-17, to ensure that recommendations are suitable under
MSRB Rule G-19, and to ensure that they are fairly priced under MSRB Rule G-30.
Among other things, dealers should ask and be able to answer the following questions:
- What are the security’s key terms and features and structural characteristics, including
but not limited to its issuer, source of funding (e.g., general obligation or revenue
bond), repayment priority, and scheduled repayment rate? Much of this information
will be in the Official Statement, which for many municipal securities can be obtained
by entering the CUSIP number in the MuniSearch box at www.emma.msrb.org. Be aware,
however, data in the Official Statement may have been superseded by the issuer’s
- Does information available through EMMA or other established industry sources indicate
that an issuer is delinquent in its material event notice and other continuing disclosure
filings? Delinquencies should be viewed as a red flag.
- What other public material information about the security or its issuer is available
through established industry sources other than EMMA?
- What is the security’s rating? Has the issuer recently been downgraded? Has the
issuer filed any recent default or other event notices, or has any other information
become available through established industry sources that might call into question
whether the published rating has been revised to take such event into consideration?
- Is the security insured, or does it benefit from liquidity support, a letter of
credit or is it otherwise supported by a third party? If so, check the credit rating
of the insurer or other backing, and the security’s underlying rating (without third
party support). If supported by a third party, review the terms and conditions under
which the third party support may terminate.
- How is it priced? Be aware that a municipal security can be priced above or below
its par value for many reasons, including changes in the creditworthiness of the
issuer and prevailing interest rates.
- How and when will interest on the security be paid? For example most municipal bonds
pay semiannually, but zero coupon municipal bonds pay all interest at the time the
bond matures. Variable rate bonds typically will pay interest more frequently, usually
on a monthly basis in variable amounts.
- What is the security’s tax status, under both state and federal laws? Is it subject
to the Federal Alternate Minimum Tax? Is it fully taxable (e.g., Build America Bonds)?
- What are its call provisions? Call provisions allow the issuer to retire the security
before it matures. How would a call affect expected future income?
If you have any questions on your own firm's written supervisory procedures as they
pertain to this subject, please contact your compliance department. If you have
any questions on the Municipal Disclosure Notification email, please contact your
Advisory Consultant at Advisors Asset Management or email