Municipal Bonds Section III: Books, Records, and Uniform Practice Rules

Records of Original Entry and Daily Summaries

• Blotters and Records of Original Entry: These records must be prepared no later than the end of the business day following the trade date ($T+1$). A blotter includes items such as journals, diaries, and day books. General ledgers are specifically excluded from the blotter classification. Blotters must contain detailed information on:

  • All receipts and deliveries of securities.
  • All purchases and sales of securities.
  • All receipts and disbursements of cash.
  • Note: Interest received on customer securities, whether they are in registered or street name, is not posted to the blotter.

• Specifics of Original Entry Records: These records must include the accrued interest, the dollar price or yield, and the aggregate par value of the bonds involved. However, they do not include the bond rating.

• Daily Reports: Broker-dealers are required to provide a Daily Report to the MSRB to summarize municipal transactions for market value measurement and audit trail purposes. This report includes:

  • Total par value of bonds traded.
  • Total market value of bonds traded.
  • The high, low, and average price of the bonds traded.
  • Note: The Daily Report does not include the total number of trades.

Retention Requirements for Municipal Records

• Six-Year Retention: The following records must be kept for $6\,\text{years}$, with the most recent $2\,\text{years}$ maintained in a readily accessible location:

  • Blotters and other Records of Original Entry (includes General Ledgers).
  • Customer account records.
  • Securities position records.
  • Syndicate transactions.
  • Customer complaints.
  • Gifts and contributions.
  • Changes in the duties of a Municipal Principal.
  • Form G-37 reports of political contributions.

• Four-Year Retention: The following records must be kept for $4\,\text{years}$, with the most recent $2\,\text{years}$ readily accessible:

  • Subsidiary records to the general ledger (e.g., securities in transfer, borrowed/loaned securities, and fails to deliver/receive). Note that subsidiary records exclude cash receipts and disbursements.
  • Records of agency and principal transactions, including swaps.
  • Copies of confirmations and every order entered by a customer (executed or unexecuted).
  • Interoffice memos and telemarketing scripts.
  • Form G-32 OS with attached Official Statements.
  • Repurchase agreements, checkbooks, bank statements, and cancelled checks.
  • Electronic communications, powers of attorney, fingerprint records, and wire transfers.
  • Copies of advertisements and publication dates, cash reconciliations, and written memoranda of agency orders.

• Record Preservation for the Life of the Enterprise: Certain organizational records must be kept for the duration of the firm's existence, including stock certificate books, partnership agreements or articles of incorporation, and minute books.

• Electronic Maintenance: Records may be stored electronically or on microfilm if copies are kept in two separate locations and one of the locations is capable of converting the records to hard copy.

Uniform Practice Rules for Settlement and Delivery

• Settlement Dates: Settlement is the day used for price and interest computations. It is set by the dealers involved, not by the DTC. Standard settlement times include:

  • Cash Transactions: Same day as the trade date.
  • Regular Way Transactions: The $1^{st}$ business day after the trade date ($T+1$).
  • When, As, and If Issued: A date agreed upon by parties, which cannot be earlier than the $1^{st}$ business day after the final confirmation is sent.

• Settlement Methods: Transactions are often settled via Delivery vs Payment (DVP), where the institution is the buyer and the dealer is the seller, or Receipt vs Payment (RVP), where the institution is the seller and the dealer is the buyer.

• Denominations of Delivery:

  • Bearer Bonds: Minimum of $\$1,000$ par value; usually delivered in $\$5,000$ units.
  • Registered Bonds: Delivered in denominations between $\$1,000$ and $\$100,000$ par value.

• Expenses of Shipment: The seller is responsible for all costs related to shipping securities, including insurance, postage, and collection or draft charges.

Good Delivery of Physical and Book-Entry Securities

• Mutilated Certificates: A certificate is not considered good delivery if certain items are indiscernible: the name of the issuer, par value, signature, coupon rate, maturity date, the seal of the issuer, or the bond/note number. Bonds cannot be rejected solely for missing CUSIP numbers.

• Authentication: Broker-dealers cannot validate or authenticate certificates; this must be performed by the issuer or a transfer agent.

• Called Securities: If a call notice is published on or before the delivery date, the certificate is bad delivery unless identify as called at the time of the trade or if the entire issue is called.

• Ex-Legal Delivery: Certificates missing legal opinions or required documents are only good delivery if they are identified as "ex-legal" at the time of the trade.

• Book-Entry Delivery: These are delivered via bookkeeping entry through a registered clearing corporation. The transaction is complete once the bookkeeping entry is made.

• Registered Form Assignments: Registered certificates must be accompanied by an assignment that matches the name on the certificate exactly. All endorsements, erasures, or alterations must have a guarantee acceptable to the registrar or transfer agent. Securities in the name of a minor or deceased person require appropriate legal documents to be considered good delivery.

Reclamation and Close-Out Procedures

• Reclamation: This is the act of returning securities that were previously delivered if they are found not to constitute good delivery. Time limits are:

  • $1\,\text{business day}$: For missing/mutilated coupons or missing legal opinions.
  • $18\,\text{months}$: For a wrong certificate.
  • No Time Limit: For missing or stolen securities.
  • A Reclamation Notice includes the security description, par value, and reason, but excludes the price.

• Close-out by Purchaser (Buy-in): This occurs when a seller fails to deliver securities. The purchaser must provide notice of intent no sooner than the $1^{st}$ business day after settlement. The purchaser sets a date no sooner than $3$ business days after notice for completion. Execution terms must be relayed by phone the same day and in writing within $5\,\text{business days}$.

• Close-out by Seller (Sell-out): This occurs if a purchaser rejects a valid delivery without reason. The seller gives notice at the close of business the $1^{st}$ business day after refusal and may sell out one business day after notification. Results are relayed by telephone the same day.

• Final Deadlines: All close-outs must be completed within $10\,\text{calendar days}$ of the settlement date.

Customer and Inter-Dealer Confirmations

• General Requirements: Confirmations must be sent at or before the completion of a transaction. Information on the confirmation cannot be altered.

• Confirmation Contents: They must include the dealer name/address/phone, customer name, trade capacity (Principal or Agent), buy/sell status, issuer name, coupon rate, maturity date, par value, and trade and settlement dates.

  • Revenue bonds must specify the revenue type.
  • If a bond is unrated or callable (excluding extraordinary calls), this must be noted.
  • Mark-up/Mark-down: Disclosed for retail principal trades if an offsetting principal trade of equal or greater size occurred the same day. It must be shown as a total dollar amount and a percentage of the prevailing market price.
  • EMMA Link: Electronic confirmations must have a hyperlink to the specific security's data on the MSRB EMMA website.

• Omission and Inclusions: Zero-coupon bonds must show the maturity value if it differs from par. Customer tax IDs are not required. Negotiated new issue sales must disclose the underwriting spread. Original issue discount (OID) bonds must state they are OID and show the initial public offering (IPO) price as a dollar amount. Accrued interest and the dollar price/yield to maturity must be shown (YTM is not required for municipal fund securities).

• Timing of Requests: If a customer requests counterparty names or commission details for an agency trade, the dealer must provide it within $5\,\text{business days}$. If the request is made more than $30\,\text{days}$ after the trade, the dealer has $15\,\text{days}$ to respond.

Miscellaneous Trade Discrepancies and Interest Claims

• Insubstantial Discrepancies: If a small discrepancy exists between the buyer and seller, the seller's calculations are used to settle the trade.

• Interest Claims: If a claim for interest is received from another dealer or customer, the recipient must respond within $10\,\text{days}$ if the claim is within $60\,\text{days}$ of the interest payment date. If the claim is made more than $60\,\text{days}$ after the payment date, the response limit is $20\,\text{days}$.

• Control Relationships: If an individual has common control with an issuer regarding debt service (e.g., a mayor working at a broker-dealer), customers must be notified in writing. Personal authorization from the customer is required for any transactions in discretionary accounts involving these securities.

Lost and Stolen Securities Reporting

• Reporting Requirements: Lost, stolen, or missing securities (including government securities) must be reported to the transfer agent, the Securities Information Center (SIC), and law enforcement.
• Recovery and Inquiry: Recovered securities must be reported within $1\,\text{business day}$. Inquiries to the SIC are mandatory for recovered securities and for any street name or bearer securities received from a customer with a value exceeding $\$10,000$.

Political Contributions and Rule G-37

• Pay-to-Play Ban: Firms are prohibited from engaging in municipal business with an issuer for $2\,\text{years}$ after a political contribution is made to an official of that issuer by the broker-dealer, a Municipal Finance Professional (MFP), or a firm-controlled PAC. This restriction follows an MFP to a new firm.

• MFP Definition: Includes persons involved in sales (RRs), solicitation, management of municipal business, or those on the firm's executive committee.

• Definitions and Exemptions:

  • De Minimis Exemption: Contributions up to $\$250$ per election are allowed if the MFP is entitled to vote for the official.
  • Contributions: Includes gifts, loans, debt payments, and inaugural expenses intended to influence an election.
  • Solicitation: MFPs cannot coordinate contributions for issuer officials but may display support privately (e.g., a yard sign).
  • Exclusions: Competitively bid G.O. bonds, Industrial Revenue Bonds, and contributions by an MFP's spouse or charitable contributions requested by a politician are not subject to Rule G-37 restrictions.

Regulatory Contact and MSRB Form A-12

• MSRB Rule A-12: Broker-dealers must designate a Primary Regulatory Contact who is a qualified Municipal Advisor Principal. Information is submitted via Form A-12.
• Update and Affirmation: Firms must update Form A-12 within $30\,\text{days}$ of any change. An annual affirmation of the form's accuracy must be completed between $January\,1$ and $January\,31$ each year.

Anti-Money Laundering and Continuing Education

• AML Compliance: Every dealer must establish a program to comply with the Bank Secrecy Act to monitor and achieve ongoing compliance.

• Continuing Education (CE):

  • Regulatory Element: Annual computer-based training covering compliance, ethics, and sales practices, completed by $December\,31$.
  • Firm Element: Annual training for all registered persons who deal with the public (and their supervisors). It must be appropriate for the firm's business.
  • Failure to Complete: Registered persons who do not complete required training are placed on inactive status and cannot be paid for registration-required activities.

Telemarketing and Social Media Guidelines

• Telemarketing Rules: Phone solicitations are restricted to the hours of $8\,\text{a.m.}$ to $9\,\text{p.m.}$ local time at the called party's location. Exceptions exist for existing customers ($18\,\text{months}$ of activity), prior permission, or broker-dealer-to-broker-dealer calls. Callers must identify themselves and their firm's purpose. Firms must maintain a version of the national "Do-not-call" registry that is no more than $31\,\text{days}$ old.

• Social Media: Firms permitting personal social media for business use must have written policies. Interactive content (real-time interaction) is treated as correspondence and does not require principal pre-approval but must be supervised. Material relating to dealer services or products may be considered an advertisement under MSRB rules.

Summary of General MSRB Rules

• G-6: Relating Fidelity Bonding to Net Capital requirements.
• G-10: Relates to customer complaints ($6\,\text{year}$ retention) and the mandatory delivery of the Investor Brochure.
• G-26: Sets the timeframe for Transfer Validation at $3\,\text{business days}$.
• G-40: Requires an Email Contact Person to be updated quarterly.
• G-41: Relates to the Anti-Money Laundering Compliance Program.