Finra issues due diligence reminder to those selling munis in primary, secondary offerings

By Angela McDaniels

Tacoma, Wash., Sept. 20 - The Financial Industry Regulatory Authority issued a reminder Monday to brokers, dealers and municipal securities dealers that they must fully understand the municipal securities they sell in order to meet their obligations under the rules of the Municipal Securities Rulemaking Board and federal securities laws.

Specifically, 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, Finra said.

The authority noted these obligations are not limited to firms involved in primary offerings. Dealers must also obtain, analyze and disclose material facts about secondary market transactions.

Finra suggested that dealers should ask and be able to answer the following questions:

• What are the security's key terms and features and structural characteristics, including its issuer, source of funding, repayment priority and scheduled repayment rate?

• Does information available through MSRB's Electronic Municipal Market Access system or other established industry sources indicate that an issuer is delinquent in its material event notice and other continuing disclosure filings?

• 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?

• Is the security insured, or does it benefit from liquidity support, a letter of credit or is it otherwise supported by a third party?

• How is it priced?

• How and when will interest on the security be paid?

• 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?

Continuing disclosures made by issuers to the MSRB via EMMA are part of the information that dealers must obtain, disclose and consider, Finra said. The Securities and Exchange Commission recently approved amendments to Securities Exchange Act Rule 15c2-12, which governs continuing disclosures, and these amendments have a compliance date of Dec. 1.

Finra is an independent regulator for securities firms doing business in the United States and is based in Washington, D.C. Questions can be directed to its member regulation fixed income group at 202 728-8085 or 202 728-8133.

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