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Compliance Corner: Winter 2022

Compliance Corner: Winter 2022

Compliance in Focus: Tax and Liquidity Implications of Buying Discount Bonds

By Saliha Olgun, Director, Market Regulation

With the recent rise in interest rates and corresponding decline in municipal bond prices, there has been a significant increase in the amount of bonds being offered and trading at substantial discounts to their par value. The MSRB published an educational issue brief highlighting recent trade data and alerting investors to the tax and liquidity implications of buying municipal bonds at a discount. While these bonds may appear attractive because of potentially higher yields, investors need to understand that they could face significant tax consequences as a result of the IRS’s de minimis rule and have a harder time selling these bonds.

While institutional investors are generally well aware of these risks, individual investors may not be. Dealers, know your obligations under MSRB Rule G-47 regarding time of trade disclosure. Read MSRB interpretive guidance on disclosure of market discount.

Read the issue brief.

Compliance Frequently Asked Questions (FAQs)

This periodic feature provides answers to commonly asked questions about compliance with MSRB rules. The answers to these questions do not create new legal or regulatory requirements or new interpretations of existing requirements and should not be interpreted by regulated entities or examining authorities as establishing new standards of conduct. This resource should be read in conjunction with MSRB rules and interpretations. The complete text of all MSRB rules and interpretations is available here.

Q :   In the 2022 Report on the Financial Industry Regulatory Authority's (FINRA) Examination and Risk Monitoring Program it was noted that examiners identified firms using false and misleading statements or claims about safety, unqualified or unwarranted claims regarding the expertise of the firm, and promissory statements and claims regarding portfolio growth in municipal securities advertisements. Does this mean dealers and municipal advisors should assess their compliance programs to ensure that their advertisements comply with MSRB Rule G-21 and Rule G-40 respectively?

A : This information is helpful in understanding what one examining authority is observing and it would be prudent for firms to use this information as a data point when assessing their compliance programs. Both MSRB Rule G-21 and G-40 require that a principal review and approve each advertisement subject to the respective rule prior to first use. In assessing its compliance program, a firm should ensure that the appropriate principal responsible for reviewing advertisements is evaluating each advertisement consistent with the content standards of MSRB Rule G-21 and G-40, as applicable. This would include, at minimum, ensuring that advertisements are fair and balanced and do not contain false, exaggerated, unwarranted, promissory or misleading statements or claims.

Compliance Tip: If the Shoe Fits, Wear It: Municipal Advisor Principals

The MSRB recently concluded its outreach to ensure that every municipal advisor firm has at least one person appropriately qualified with the Series 54, Municipal Advisor Principal Qualification Examination, in order to comply with the obligation, under MSRB Rule G-44, to have a supervisory principal in place, vested with the authority to carry out and effectively discharge the responsibility to supervise the municipal advisory activities of the municipal advisor and its associated persons. As a reminder all individuals who meet the definition of a municipal advisor principal - that is, a person who engages in the management, direction or supervision of the municipal advisory activities of the municipal advisor and its associated persons, must be qualified as a municipal advisor principal by taking and passing the Series 54 Examination.

Read Rule G-3, on Professional Qualification Requirements
Read Rule G-44, on Supervisory and Compliance Obligations of Municipal Advisors

Compliance Calendar

Dealers and municipal advisors should note the following key compliance dates and deadlines relevant during the second quarter of calendar year 2022.

April 1, 2022 – First Day to File Form G-37 for quarter ending March 31

April 30, 2022 A-11 Annual Municipal Advisor Fee Due

April 30, 2022 – Last Day to File Form G-37 for quarter ending March 31

May 1, 2022 – 529 underwriting assessment invoiced

May 31, 2022 – Last day to submit payments for 529 underwriting assessment

July 1, 2022 – First day to file Form G-37 for quarter ending June 30

Regulatory Roundup

Keep up with current requests for comment, updated regulatory requirements and upcoming rule filings, and learn about opportunities to provide input at various stages of the MSRB’s rulemaking process.

March 1, 2022 MSRB Provides Additional Regulatory Relief During COVID-19 Pandemic by Further Extending the Temporary Timeframe for Remote Office Inspections

January 13, 2022 Designation Information Regarding Mandatory Participation in Business Continuity and Disaster Recovery Testing