MSRB Files Revised Series 52 Study Outline and Selection Specifications

Today the Municipal Securities Rulemaking Board (“MSRB”) filed with the Securities and Exchange Commission (“SEC”) revisions to the study outline and selection specifications for the Municipal Securities Representative Qualification Examination (Series 52) program. [1]   A committee of industry members and MSRB staff recently undertook a review of the Series 52 examination program.  As a result of this review, the MSRB is proposing to make revisions to increase the length of the examination from 100 to 115 questions and make the following changes to the study outline: regroup certain topics to allow more detailed testing of certain product knowledge and MSRB rules and eliminate redundancy; delete dated references to certain topics in the current outline; provide detail about products covered in the examination; and incorporate generic terms instead of proprietary names.   

MSRB Rule G-3(a)(i) states that the activities of a municipal securities representative include one or more of the following activities relating to municipal securities: underwriting, trading or selling municipal securities; rendering financial advisory or consultant services to issuers of municipal  securities; research or investment advice, or communications with customers, about any of the activities named heretofore.  A municipal securities representative may also qualify as such by taking the General Securities Representative Examination (Series 7).  An individual who takes the Investment Company Products/Variable Contracts Examination (Series 6) may qualify as a limited representative, but activities are limited to those in municipal fund securities. 

The revised Series 52 examination program will be implemented on January 3, 2011.  The revised examination continues to cover areas of knowledge required to conduct municipal securities activities.  A summary of the changes to the content outline for the Series 52 Examination, detailed by major topic headings, is provided below.  Changes are stated as revisions to the current outline.

Part One: Municipal Securities

• The emphasis given this section has been increased from 55% to 57% of the examination.

Part One-I: Types of Municipal Securities

Special type bonds

• “Variable rate securities” is moved and tested as “Variable rate demand obligations” under “Short-term obligations.”
• “Taxable municipals” are tested under a new section entitled “Taxable municipal securities.”

Taxable municipal securities

• “Build America Bonds (BABs),”  “Taxable municipal bonds” and “Other tax credit bonds” are added.

Short-term obligations

• “Variable rate demand notes” are tested as “Variable rate demand obligations.”

Municipal fund securities

• “Municipal fund securities (Basic characteristics, ownership and contribution limits)” are added.

Part One-II: Characteristics

Basic characteristics

• “Basis price” is removed from “Method of quotations.”
• “Bearer” and “Registered as to principal only” are deleted from “Forms of Ownership.”
• The subtopics “Interchangeable with bearer” and “Non-interchangeable” are deleted from “Fully registered.”
• “When as and if issued (WI)” under “Delivery procedures” is moved to “Syndicate operational procedures.”
• “As mutually agreed upon” becomes a descriptor for “Special settlement.”
• “Forwards (forward delivery)” is stated as “Forward delivery.”
• “Zeros” are added as a subtopic under “Rates.”
• “Convertible” is changed to “Convertible/stepped coupons.”

Tax considerations

• “Original issue discount” is tested as “Original issue discount/premium.”
• “Market discount/premium” is added.

Factors affecting marketability and liquidity

• “Quality” is deleted.
• “Dollar price” is changed to “Dollar/yield price.”
• “Registered, bearer, or book-entry only form” is deleted.
• “Credit and liquidity support,” “Denominations,” “Type of issuance” and “Source of funds” are added.

Part One-III: The Market for Municipal Securities

Primary market

Methods of primary financing

• “Limited offering” is added as a parenthetical after “Private placement.”

Information sources

• “Direct mail from issuers or financial advisors” is stated as “Issuers or financial advisors.”
• The following topics have been deleted: “The Bond Buyer;” “Munifacts;” “Dalnet;” “Newspaper and publications;” “Bond Buyer New Issue Worksheets;” “Moody’s Bond Survey;” “Bloomberg;” and “Other sources (e.g., Bond Express and Bondtrac).”
• The following subtopics are added: “EMMA;” “New issue wires;” and “Print and electronic news services.”

Underwriting procedures

• The parenthetical descriptor “eastern account” is deleted from the topic “Undivided.”
• The parenthetical descriptor “western account” is deleted from the topic “Divided.”
• “Formation of selling groups” is changed to “Selling groups.”
• “Bid form” under topic “Determination of syndicate bid” is deleted.
• “Terms and conditions” and “Submission of bid” are added under “Computation of bid.”
• “Gross interest cost” is added as a subtopic under “Basis for award.”
• "Bond years” is added under “Computation of bid.”

Syndicate operational procedures

• “Retail orders” is added as a subtopic under “Priority provisions.”
• “Establish time of first trade” is added.
• “Required disclosures” is added with subtopics “(a) EMMA;” “(i) Primary offerings;” “(ii) Material event notices;” “(b) NIIDS;” “(c) SHORT;” and “(d) Delivery of official statement.”

Secondary market

• Heading “Characteristics” and subtopic “Negotiated versus auction” are deleted.
• Subtopic “Over-the-Counter (OTC)” is changed to “Traded over-the-counter (OTC).”

Information sources

• “The Bond Buyer,” “Munifacts,” and “Bloomberg” are deleted; “Alternative trading systems (ATS),” “EMMA,” and “Electronic information services” are added.

Market participants

• “Dealers” is added.

Secondary market procedures

• “Quote,” “Firm bid,” “Firm offering,” and “Multiples of” are deleted from “Trading terms.”
• “Offering,” “Minimums and multiples,” and “Cover bid” are added to “Trading terms.”

Market indicators

• The heading “The Bond Buyer” and subtopics “Placement ratio” and “Indices” (and indices listed thereunder) are deleted.
• The following topics are added under new heading “Published indices:” “Bond Buyer indices” and subtopics “Visible supply” and “Placement ratio” thereunder; “MMD curve;” “SIFMA index;” subtopic “U.S. Treasuries;” and “London Interbank Offered Rate (LIBOR).”

Other market-level indicators

• The following topics are deleted: “Secondary market activity;” “Dollar bond market activity;” “Financial futures” and subtopics “Municipal bond contract” and “Municipal over bond (MOB) spread” thereunder.

Customer suitability considerations

Kinds of investment risks

• The following topics are added: “Legislative risk;” “Price risk;” “Selection risk;” “Timing risk;” and “Liquidity risk.”

Part One-IV: Analyzing Municipal Credit

Revenue bonds

Security

• “Non-discrimination covenant” under the topic “Bond indenture” is deleted.
• The word “fund” has been deleted in each of the types of funds named under “Flow of funds.”
• The parenthetical “depreciation” has been deleted from “Renewal and replacement.”

Sources of credit information

• “Continuing disclosure information (EMMA)” has been added.

Credit enhancements

• “Enhanced securities” and “Guaranteed investment contract (GIC)” have been deleted.
• “Insured” has been changed to “Insurance.”
• “Escrow” has been added.

Part One-V: Mathematical Calculations and Methods

• The order of certain topics under this section has been changed to facilitate assignment of questions on the test.  Changes in content are as indicated below.

Relationship of bond prices to change in:

• “Call/put features” has been added.

Accretion of discount

• Parenthetical “OID” has been added.

Underwriting computations

• This header has been removed with each topic thereunder (“Bond years;” “Production;” “Spread;” “Net interest cost;” and “True interest cost”) because all are covered under “Underwriting procedures.”

Part Two: U. S. Government, Federal Agency and Other Financial Instruments

• The emphasis given this section has decreased from 7% to 4% of the examination.

Part Two-I: Types

Obligations of the U. S. Treasury

• “TIPS” has been added.

Obligations of federal agencies

• “Student Loan Marketing Association (SLMA or Sallie Mae)” has been deleted.

Money market instruments

• “Bankers acceptances” has been deleted.

Other financial instruments

• Topics detailed under this heading have been removed; revised heading is “Other financial instruments (corporate bonds, CMOs, etc.).”

Part Two-II: Characteristics of Various U. S. Government, Federal Agency and Other Financial Instruments

Marketability

• “Ratings” and “Economic indicators” are added.

Delivery

• Detail under this topic (“Book-entry only;” “Bearer;” and “Registered”) has been deleted; revised header is “Form of Delivery.”

Part Two-III: The Market for U. S. Government, Federal Agency and Other Financial Instruments

• The major heading for this section has been revised: “The Market for U. S. Government, Federal Agency and Other Financial Instruments—Impact and Relationship to Other Fixed Income Markets.”
• These topics and all associated subtopics have been deleted: “New Issue Marketing Methods;” “Secondary market;” and “Federal Reserve’s open-market participation in the market for each security, where applicable.”
• The topics “Index floaters” and “Credit spreads” have been added.

Part Four: Federal Legal Considerations

• The emphasis given to this section has increased to 26% from 25% of the examination.

Part Four-I: Regulation of Municipal Market Professionals

Securities Exchange Act of 1934

• The reference to “National Association of Securities Dealers Regulation, Inc. (NASDR)” under “Enforcement” has been changed to “FINRA.”

Part Four-II: Securities Investor Protection Act of 1970

• Heading “Inapplicable to bank dealers” has been deleted.

Part Four-III: MSRB rules

• Detail under “Advertising (G-21)” has been deleted.
• “Delivery of Official Statements, Advance Refunding Documents and Forms G-36 (OS) and G-36 (ARD) to the Board or Its Designee (G-36)” has been deleted.
• “Anti-money laundering compliance program (G-41)” has been added.

ATTACHMENT A: Contents of a Typical Notice of Bond Sale

• “Terms and Conditions” has been added.

ATTACHMENT B: Outline of a Typical Official Statement

• “Organization and management” has been revised to “Organization” under “Description of issuer.”

The MSRB is proposing similar changes to the Series 52 selection specifications and question bank.  The increased length of the examination permits testing of certain key concepts or rules without decreasing representation of related topics under the general topic heading.  The examination will consist of 115 multiple choice-questions assigned to the four areas of the examination as shown below.  The percentages given for each section are rounded to an even number.

Municipal Securities	57%
U.S. Government, Federal Agency and Other Financial Instruments	4%
Economic Activity, Government Policy and The Behavior of Interest Rates	13%
Federal Legal Considerations	26%

Candidates will now be allowed three and one-half hours (instead of the current three hours) for each testing session because of the increase in the length of the examination from 100 to 115 questions.  Each question will continue to count one point, and each candidate must correctly answer 70 percent of the questions in order to receive a passing grade. 

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Questions about the Series 52 examination program may be directed to Loretta Jones, Director, Professional Qualifications, or Maureen Hawkins, Professional Qualifications Analyst.

October 26, 2010