Municipal Disclosures

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 obligations.

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:

  1. 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 Be aware, however, data in the Official Statement may have been superseded by the issuer’s on-going disclosures.

  2. 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.

  3. What other public material information about the security or its issuer is available through established industry sources other than EMMA?

  4. 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?

  5. 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.

  6. 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.

  7. 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.

  8. 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)?

  9. 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 MunicipalDisclosure@aamlive.com