The Municipal Securities Rulemaking Board (MSRB) and FINRA have issued Regulatory Notice 10-41 reminding municipal securities dealers about several important obligations in selling municipal securities in the secondary market. There is a great deal of information and guidance provided in RN 10-41, as well as a very thorough list of questions to consider prior to selling these securities and a Checklist for Customer Disclosure that can be downloaded and used as a compliance guide.
FINRA states in the notice that it has concerns regarding whether firms fully understand their obligations with regard to disclosure of material information to customers. This is based on "several ongoing sweeps involving municipal securities" which are currently being evaluated.
Specifically, the executive summary cautions that brokers, dealers and others dealing in municipal securities, need to ensure they are knowledgeable in the municipal securities they sell. If dealers do not fully understand these offerings, they could be failing to meet such critical obligations as disclosures, pricing and suitability under the Municipal Securities Rulemaking Board and federal securities laws.
These obligations reach beyond primary offerings and extend to secondary markets. Dealers must "obtain, analyze and disclose all material facts about secondary market transactions that are known to the dealer, or that are reasonably accessible to the market through established industry sources." The notice lists these sources including, "official statements, continuing disclosures, trade data, and other information made available through the MSRB's Electronic Municipal Market Access system (EMMA)."
In addition, prior to recommending a security, firms need to ensure that they have reasonable grounds for a suitability determination. Firms must look beyond EMMA to obtain and disclose information when that is "material and available through other public sources."
Further the notice advises that firms have an obligation to determine prevailing market price using these sources and establishing prices. Firms are expected to independently analyze the securities, rather than relying on a security's credit rating.
For more information on this Regulatory Notice and other compliance issues, please visit the FINRA website.
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