Municipal Securities Regulations: Prices, Commissions & Quotes

Instructor: Yusuf Abdullah

Yusuf has taught Science and Mathematics at school level and Finance and Economics at University level. He has recently earned his Ph.D in Financial Econometrics field.

This lesson deals with MSRB rules related to municipal securities. Learn about MSRB rules D-12 (Definition of Municipal Fund Securities), G-13 (Quotations Related to Municipal Securities), and G-30 (Prices and Commissions).

Municipal Securities

Sally is a police officer and has recently been promoted to a detective, with increased pay. She is in conversation with Harry (a series 7 licensee and a securities dealer) regarding tax-exempt investing, especially in municipal securities. She wants to make sure which securities are usually classified as municipal securities. Harry informs her that municipal securities are usually issued by state or local governments to carry out projects or public works.

However, a formal definition comes from Municipal Securities Rulemaking Board (MSRB) Rule D-12, which itself comes from Section 3(a)(29) of the Securities Exchange Act of 1934. Let's take a look.

Definition of Municipal Fund Securities

MSRB Rule D-12 borrows the definition of municipal securities from Section 3(a)(29) of the Securities Exchange Act of 1934. As per Section 3(a)(29) of the Securities Exchange Act of 1934, municipal securities are defined as securities which are a direct obligation or obligations for payment of interest and principal by a state or any governmental subdivision, such as a city, county, agency, etc. Industrial bonds as defined by section 103(c)(2) of the Internal Revenue Code of 1954 can also be termed as municipal securities if the income from them is deductible from the gross income.

Sally wonders if all tax-exempt bonds are municipal bonds. Harry states that this is not always the case, but municipal bonds are among the largest groups of tax-exempt bonds.

Quotations For Municipal Securities

Later into the conversation, Sally shows Harry some bond quotes in a financial newspaper. She understands that the bond quotes are represented per $100 par but is worried if the quotes are subject to manipulation by any vested interests. Harry assures her that Rule G-13 of the Municipal Securities Rulemaking Board (MSRB) ensures that such manipulation is prevented. Some of the salient features of this rule are:

  • Published quotes to be actual bid or offer quotes on such securities. Dealers should be willing to buy and sell at these prices.
  • Dealers are allowed some leeway in quotes to adjust them for current market trends, but such adjustments should be based on fair value, dealer inventory, and anticipation of the market price.
  • Prohibition of a dealer entering a quote on behalf of another dealer if it does not represent the current bid and offer quotes.
  • The quotes disseminated through any published media should be honored. This means that the dealer should be willing to buy and sell at the published quotes until the inventory finishes or the quotes are changed.

Prices and Commissions

Sally is skeptical about appropriate prices because bond quotes are not updated as frequently as stock quotes. She is also worried that she might be overcharged on commissions. Harry allays her fears by informing her that MSRB Rule G-30 addresses such concerns of investors. He informs Sally that Rule G-30 addresses concerns by ensuring:

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