Most transactions in municipal securities by investors – both in the new-issue market and in the secondary market – are effected through municipal securities dealers subject to MSRB rules. Among other things, these rules help to ensure that dealers make appropriate disclosures to investors, that the transactions recommended by dealers are suitable for the investors and that transactions are priced fairly.
Suitability of Recommended Transactions
In many cases, a dealer may recommend a particular investment or course of investments. In making a recommendation, the dealer must have reasonable grounds for believing that the recommendation is suitable.The dealer must make this "suitability determination" based on the information available about an investor and the security he or she is purchasing. The same is true if the dealer has recommended that an investor sell a security he or she owns. Investors should note that a dealer is obligated to make a suitability determination only if it has made a recommendation. If an investor has already made a decision about a particular investment, the dealer generally will not be obligated to make a suitability determination.
Disclosure to Customers
If an investor makes an investment through a municipal securities dealer, the dealer must provide the investor with information material to the transaction at or prior to the time the investor agrees to enter into that transaction. The investor should consider all relevant features of the security, including its yield, tax status and call or put features. Disclosure of material information typically will be provided by directing the investor to the MSRB's EMMA website to access an electronic copy of the issuer's official statement (sometimes referred to as a plan disclosure document in the case of 529 college savings plan). Investors can also request a printed copy of an official statement.
In connection with sales of new issue securities, the official statement must be made available by no later than the settlement of an investment (generally, when an investor takes ownership and has paid for an investment). The municipal securities dealer also must provide an investor with a confirmation of the transaction, which generally must be provided on a transaction-by-transaction basis (for many 529 college savings plans, transactions may instead be confirmed through periodic statements). The transaction confirmation includes basic information about the transaction. In particular, information on the confirmation - particularly the CUSIP number of the security - can be used to search for information about the security on EMMA.
Confirmation Requirement
MSRB rules require municipal securities dealers to send the investor a written confirmation of the transaction prior to the completion (or settlement) of the transaction. Various types of information must appear on the confirmation, including the par value of the transaction, the price and (unless sold at par value) the yield of the transaction. The confirmation also must include information about the security including, among other things, the name of the issuer, the coupon rate, and the “CUSIP number” for the security. The CUSIP number is an alpha-numeric identifier used universally in the securities industry that precisely identifies the security that is being bought or sold.
Dealer Compensation
Most transactions in the municipal securities market are effected by dealers acting in a "principal” capacity rather than acting as broker (i.e., on an agency basis for the customer). When acting in a principal capacity, the dealer does not charge a commission, as would be the case for a broker taking a customer’s order for execution of a stock transaction on an exchange. Instead, the dealer is compensated by the profit that is made from the differential between the price at which securities are bought and sold. This differential is called a “mark up.”
Similarly, when an investor sells a municipal security, the price received from a dealer generally will be “marked down” from the price at which the dealer hopes to later resell that security. In some cases, instead of relying on transaction-based mark-ups or mark-downs, dealers may charge their customers an account-based fe that compensates the professional based on the amount of an investor’s assets under management.