Rule Changes Filed With SEC Regarding Qualification as a Municipal Securities Representative and Information Concerning Associated Persons

On September 13, 2011, the Municipal Securities Rulemaking Board (“MSRB”) filed a proposed rule change[1] with the Securities and Exchange Commission (the “SEC”) to require passage of the Series 52 examination in order for a municipal securities representative to engage in any municipal securities activities other than sales to, or purchases from customers[2] (“sales activities”).  The proposed rule change would also streamline the requirements for the maintenance of records on associated persons.  The MSRB requested that the proposed rule change become effective on November 7, 2011, which, as explained below, is the date that FINRA has requested as the effective date for revisions to the Series 7 examination.

Individuals who passed the Series 7 examination prior to November 7, 2011, would not have their registration status affected by this proposed rule change as long as they have maintained this registration.

BACKGROUND

MSRB Rule G-3(a)(i) defines a municipal securities representative as a natural person associated with a broker, dealer or municipal securities dealer (“dealer”), other than a person whose functions are solely clerical or ministerial, whose activities include one or more of the following:

1. underwriting, trading or sales of municipal securities;
2. financial advisory or consultant services for issuers in connection with the issuance of municipal securities;
3. research or investment advice with respect to municipal securities; or
4. any other activities that involve communication, directly or indirectly, with public investors in municipal securities

provided, however, that the activities enumerated in 3 and 4 above are limited to such activities as they relate to the activities enumerated in 1 and 2 above.

An individual seeking to become qualified as a municipal securities representative must pass either of two qualification examinations – the Municipal Securities Representative Qualification Examination (Series 52) or the General Securities Registered Representative Examination (Series 7).

On September 7, 2011, FINRA filed with the SEC a proposed rule change to restructure the Series 7 examination to focus on a broader range of securities products available for sale by registered representatives.[3]  The effect of these changes would be a de-emphasis on non-sales aspects of the activities of securities professionals.  In focusing on general principles applicable to the buying and selling of a broad range of securities, rather than specific products, the restructured Series 7 examination would reduce the number of questions that test for specific knowledge of municipal securities and the rules of the MSRB.  Given the shift in emphasis of the Series 7 examination and the reduced number of municipal questions, in the view of the MSRB, passage of the Series 7 examination would no longer represent a useful gauge of whether a securities professional was qualified to perform municipal securities activities other than sales activities.

SUMMARY OF PROPOSED RULE CHANGE

As a result of this restructured Series 7 examination, the MSRB determined to file the proposed rule change consisting of amendments to MSRB Rule G-3, on professional qualifications.  The proposed rule change would provide that the Series 7 examination would no longer qualify individuals as “municipal securities representatives,” unless they were engaged solely in sales activities or they passed the Series 7 examination prior to the effective date of the proposed rule change.  Instead, passage of the Series 52 examination would be required for any municipal securities activities other than sales activities.

The proposed rule change would create a sub-category of municipal securities representative referred to as a “municipal securities sales limited representative” and would apply to individuals whose activities with respect to municipal securities are limited exclusively to sales activities.  The proposed rule change would provide that an individual could qualify as a municipal securities sales limited representative by passage of the Series 7 examination.  Other individuals would be required to pass the Series 52 examination in order to qualify as full municipal securities representatives, unless they had passed the Series 7 examination prior to the effective date of the proposed rule change and had maintained this registration.

The proposed rule change would also require a municipal securities sales limited representative who wished to become a municipal securities principal to pass the Series 52 examination prior to taking the Series 53 municipal securities principal examination.  Otherwise, the proposed amendments to Rule G-3 would not distinguish between “municipal securities sales limited representatives” and other “municipal securities representatives.”

The MSRB is also filing proposed amendments to MSRB Rule G-7, on information concerning associated persons.  Rule G-7 requires dealers to keep records concerning their associated persons, including the category of function they perform “whether municipal securities principal, municipal securities sales principal, municipal securities representative or financial and operations principal.”  The proposed rule change would add “municipal securities sales limited representative” to that list.[4]  Additionally, the proposed rule change would streamline Rule G-7(b) by simply requiring that dealers obtain either Form U4 (in the case of non-bank dealers) or Form MSD-4 (in the case of bank dealers), rather than repeating the categories of information required by those forms.

Questions concerning the proposed rule change may be directed to Loretta Jones, Director of Professional Qualifications, or Peg Henry, General Counsel, Market Regulation, at (703) 797-6600.

September 13, 2011 

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TEXT OF PROPOSED AMENDMENTS [5]

Rule G-3: Classification of Principals and Representatives; Numerical Requirements; Testing; Continuing Education Requirements

No broker, dealer or municipal securities dealer or person who is a municipal securities representative, municipal securities principal, municipal securities sales principal or financial and operations principal (as hereafter defined) shall be qualified for purposes of rRule G-2 unless such broker, dealer or municipal securities dealer or person meets the requirements of this rule.

(a) Municipal Securities Representative and Municipal Securities Sales Limited Representative.

(i) Definitions.

(A) The term “municipal securities representative” means a natural person associated with a broker, dealer or municipal securities dealer, other than a person whose functions are solely clerical or ministerial, whose activities include one or more of the following:

(A) (1) underwriting, trading or sales of municipal securities;

(B) (2) financial advisory or consultant services for issuers in connection with the issuance of municipal securities;

(C) (3) research or investment advice with respect to municipal securities; or

(D) (4) any other activities which involve communication, directly or indirectly, with public investors in municipal securities;

provided, however, that the activities enumerated in subparagraphs (C) (3) and (D) (4) above shall be limited to such activities as they relate to the activities enumerated in subparagraphs (A) (1) and (B) (2) above.

(B) The term “municipal securities sales limited representative” means a municipal securities representative whose activities with respect to municipal securities are limited exclusively to sales to and purchases from customers of municipal securities.

(ii) Qualification Requirements.

(A) No change.

(B) The requirements of subparagraph (a)(ii)(A) of this rule shall not apply to:

(1) any person who is duly qualified as a general securities representative by reason of having taken and passed the General Securities Registered Representative Examination before [the effective date of the proposed rule change], and

(2) a municipal securities sales limited representative who is duly qualified as a general securities representative by reason of having taken and passed the General Securities Registered Representative Examination.

(C) – (D) No change.

(iii) No change.

(b) Municipal Securities Principal; Municipal Fund Securities Limited Principal.

(i) No change.

(ii) Qualification Requirements.

(A) No change.

(B) Any person seeking to become qualified as a municipal securities principal in accordance with subparagraph (b)(ii)(A) of this rule must, prior to being qualified as a municipal securities principal:

(1) have been duly qualified as either a municipal securities representative or a general securities representative; provided, however, that any person who qualifies as a municipal securities representative solely by reason of subparagraph (a)(ii)(C) shall not be qualified to take the Municipal Securities Principal Qualification Examination on or after October 1, 2002, and any person who qualifies as a municipal securities representative solely by reason of clause (a)(ii)(B)(2) shall not be qualified to take the Municipal Securities Principal Qualification Examination on or after [the effective date of the proposed rule change]; or

(2) have taken and passed either the Municipal Securities Representative Qualification or, in the case of persons described in clause (a)(ii)(B)(1), the General Securities Registered Representative Examination.

(C) – (D) No change.

(iii) – (iv) No change.

(c) – (h) No change.

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Rule G-7: Information Concerning Associated Persons

(a) No associated person (as hereinafter defined) of a broker, dealer or municipal securities dealer shall be qualified for purposes of rRule G-2 of the Board unless such associated person meets the requirements of this rule. The term "associated person" as used in this rule means (i) a municipal securities principal, (ii) a municipal securities sales principal, (iii) a financial and operations principal, and (iv) a municipal securities representative, (v) a municipal securities sales limited representative, and (vi) a municipal fund securities limited principal.

(b) Every broker, dealer and municipal securities dealer shall obtain from each of its associated persons (as defined in section (a) of this rule), and each associated person shall furnish to the broker, dealer or municipal securities dealer with which such person is or seeks to be associated, a questionnaire, which shall be signed by a municipal securities principal or general securities principal, containing at least the following information:

(i) such person's name, residence address, social security number, and the starting date or anticipated starting date of such person's employment or other association with such broker, dealer or municipal securities dealer;

(ii) date of birth;

(iii) a complete, consecutive statement of employment and personal history for at least the immediately preceding ten years, including full time and part time employment, self employment, military service, unemployment, or full-time education. For each period of employment, the position held at the time of leaving said employment;

(iv) a record of all residential addresses for at least the immediately preceding five years;

(v) a record of any denial of membership or registration, and of any disciplinary action taken against, or sanction imposed upon, such person by any federal or state securities or federal or state bank regulatory agency or by any national securities exchange or registered securities association, including any finding that such person was a cause of any disciplinary action or violated any law;

(vi) a record of any denial, suspension or revocation of registration with the Commission as a broker, dealer, or municipal securities dealer or of any denial, suspension or revocation of, or expulsion from, membership in a national securities exchange or a registered securities association, of any broker, dealer, or municipal securities dealer with which such person was associated in any capacity when such action was taken;

(vii) a record of any permanent or temporary injunction entered against such person pursuant to which such person was enjoined from acting as an investment advisor, underwriter, broker, dealer, or municipal securities dealer, or from engaging in or continuing any conduct or practice in connection with any such activity, or in connection with purchase or sale of any security;

(viii) a record of any convictions of such person within the past ten years involving the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, or conspiracy to commit any such offense; or arising out of the conduct of the business of a broker, dealer, municipal securities dealer, investment advisor, bank, insurance company or fiduciary; or involving the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities; or involving the violation of section 152, 1341, 1342, or 1343 or chapter 25 or 47 of title 18, United States Code;

(ix) a record of any refusal by a surety company to issue a fidelity bond covering such person; any payments made by a surety company on coverage of such person or cancellation of such coverage; and a statement whether such person is currently bonded; and

(x) a record of any other name or names by which such person has been known or which such person has used.

A a completed Form U-4 U4 or similar form prescribed by the Commission or a registered securities association for brokers, dealers and municipal securities dealers other than bank dealers or, in the case of a bank dealer, a completed Form MSD-4 or similar form prescribed by the appropriate regulatory agency for such bank dealer, containing the foregoing information, shall satisfy the requirements of this section.

(c) To the extent any information on the form furnished by an associated person pursuant to section (b) of this rule is or becomes materially inaccurate or incomplete, such associated person shall furnish in writing to the broker, dealer or municipal securities dealer with which such person is or seeks to be associated a corrected form or a statement correcting such information.

(d) No change.

(e) Every broker, dealer and municipal securities dealer shall maintain and preserve a copy of the form questionnaire furnished pursuant to section (b) of this rule, and of any corrected forms or additional statements furnished pursuant to section (c) of this rule, until at least three years after the associated person's employment or other association with such broker, dealer or municipal securities dealer has terminated.

(f) Every broker, dealer and municipal securities dealer shall maintain and preserve a record of the name and residence address of each associated person, designated by the category of function performed (whether municipal securities principal, municipal securities sales principal, municipal securities representative or financial and operations principal) and indicating whether such person has taken and passed the qualification examination for municipal securities principals, municipal securities sales principals, municipal securities representatives, municipal securities sales limited representatives, municipal fund securities limited principals or financial and operations principals prescribed by the Board or was exempt from the requirement to take and pass such examination, indicating the basis for such exemption, until at least three years after the associated person's employment or other association with such broker, dealer or municipal securities dealer has terminated.

(g) – (h) No change.