Municipal Securities Rulemaking Board

Recommendations. This is in response to your letter in which you ask whether certain activities of [name deleted] (the “dealer”) described in your letter constitute recommendations of municipal securities transactions to its customers within the meaning of Board rule G-19, on suitability of recommendations and transactions. In preparing this response, we have limited the scope of our review to the rules adopted by the Board, including rule G-19. You should consult with the Securities and Exchange Commission (the “SEC”) for any interpretations of its Rule 15c2-12.[1]

We agree with the SEC’s statement that “most situations in which a broker, dealer or municipal securities dealer brings a municipal security to the attention of a customer involve an implicit recommendation of the security to the customer.”[2] We also agree with the position taken by NASDR that “[w]hether a particular transaction is in fact recommended depends on an analysis of all the relevant facts and circumstances.”[3] Thus, the Board believes that, for purposes of rule G-19, a determination of whether a recommendation has been made under any particular set of facts and circumstances is dependent upon a close examination of such specific facts and circumstances. Such an inquiry is properly undertaken by the agencies charged with enforcing the Board’s rules. MSRB interpretation of February 17, 1998.

ENDNOTES

[1] You have stated that staff of NASD Regulation, Inc. (“NASDR”) found during an examination of the dealer “a failure to comply with MSRB Rule G-27(c), in that a review of written supervisory procedures indicated that the firm’s procedures manual does not establish written procedures with respect to SEC Rule 15c2-12.” To the extent that the dealer argues that its written supervisory procedures are not deficient under Board rule G-27 because it believes that it does not recommend any municipal securities to customers within the meaning of section (c) of SEC Rule 15c2-12, the dealer should, as noted above, consult with the SEC for an interpretation of the term “recommend” as used in its rule.

[2] Exchange Act Rel. No. 33742 (Mar. 9, 1994).

[3] Letter dated January 23, 1997 from John M. Ramsey, Deputy General Counsel, NASDR, to Stuart J. Kaswell, Senior Vice President and General Counsel, Securities Industry Association.

Recommendations: advertisements. This is in response to your letter in which you state that your firm is counsel to [name deleted] with regard to a certain issue of municipal securities. You note that, while the issue was in its planning stages, a solicitation for purchase of securities from the issue was distributed by a certain dealer without the knowledge or approval of the issuer. In addition, you state that the solicitation incorrectly indicated a date the issue was scheduled to be issued and incorrectly stated the term of the issue.

Rule G-21, on advertising, provides that no dealer shall publish or cause to be published any advertisement concerning municipal securities which such dealer knows or has reason to know is materially false or misleading. The rule defines advertisement as any material (other than listings of offerings) published or designed for use in the public media, or any promotional literature designed for dissemination to the public, including any notice, circular, report, market letter, form letter or reprint or excerpt of the foregoing.

On May 7, 1985, the Board released an interpretive notice concerning the application of suitability requirements to investment seminars and customer inquires made in response to a dealer’s advertisements.[1] In that notice the Board stated that the requirements of rule G-19, on suitability of recommendations and transactions, apply to recommendations made to customers who contact a dealer in response to an advertisement for municipal securities in the same way as they apply to all other recommendations made to customers. Under rule G-19, a dealer may make a recommendation only if the dealer has reasonable grounds, based upon information available from the issuer of the securities or otherwise, for recommending the security and, in addition, the dealer believes that the recommendation is suitable for the particular customer in light of the customer’s financial background, tax status, and investment objectives and any other similar information concerning the customer known by the dealer.[2]

If an individual contacts a dealer for additional information concerning municipal securities that were the subject of any advertisement, a professional is permitted to recommend a particular transaction to the individual only if he has reasonable grounds for recommending the security in light of information about the security available from the issuer or otherwise. Moreover, the professional may make the recommendation to the customer only if, after making a reasonable inquiry, he has reasonable grounds to believe and does believe that the recommendation is suitable for the customer on the basis of the financial and other information provided by the customer or obtained from other reliable sources.

With respect to the advertisement in question, the fact that it includes an application form to be submitted by customers along with a check in purchasing securities from the issue would seem to indicate that the dealer was intending to effect transactions in the issue without undertaking a review of appropriate suitability determinations. A transaction effected in such a manner would be a violation of rule G-19. MSRB interpretation of February 24, 1994.

ENDNOTES

[1] [See Rule G-19 Interpretation – Notice Concerning the Application of Suitability Requirements to Investment Seminars and Customer Inquiries Made in Response to a Dealer’s Advertisements, May 7, 1985, reprinted in MSRB Rule Book.]

[2] Rule G-8, on books and records, requires the information obtained about the customer to be recorded in the customer account record to assist in monitoring compliance with rule G-19. Dealers must ensure that these records are kept current if subsequent changes in the customer’s position affect the suitability of recommendations made to the customer.

Rule G-19 Interpretive Letters

CROSS-REFERENCES