municipal taxation outline

• municipals-exempt from federal taxes
• exempt from state taxation if owner is from state
• IRS determines tax exempt status on municipal bonds through tax code
• bond counsel assesses tax exempt status of interest on bond
• yield=(municipal bond yield)/(100%-tax bracket)
• use yield NOT coupon to calculate municipal bond yield 
• buy at discount, appreciation taxed as ordinary income at maturity
• buy at premium, held to maturity, no loss
• Original issue discount (OID) and zero coupon bond-no set interest rate: appreciation=interest=tax free
• buy at premium, amortize premium over life of bond

Bond swaps

• to produce a loss to offset gain for year
• to produce gain to offset loss for year
• to increase or change quality of portfolio
• to increase income for portfolio 

An investor is shown an 11.5% corporate bond that is being offered on a 10.8% yield. What is the equivalent yield of a municipal bond if the investor is in the 28% tax bracket?

• 7.75% yield
• 10.8 x 72% = 7.77 round to 7.78%

Who won't buy municipal bonds

• nonprofits
• corporate pension plans

Who will buy municipal bonds

• banks
• insurance companies
• individuals

All of the following are purchasers of municipal bonds except?

• corporate pension plans
• do not pay taxes
• do not need low, tax free interest from muni bonds
• government bonds offer higher returns with less risk 

Writer of rules

• Municipal Securities Rulemaking Board (MSRB) 
• apply to broker/dealer firms
• apply to underwriters
• apply to registered representatives
• apply to promoters of municipal bonds
• issuers exempt

Enforcement of rules

• FINRA: Financial Industry Regulatory Authority-for all firms who sell securities, imposes violations for violations of rules by securities firms
• Comptroller of the Currency, for banks
• Federal Reserve Board "The Fed", for banks
• Federal Deposit Insurance Corporation (FDIC)

SEC, 

• enforces violations for non-FINRA members
•  imposes penalties of Securities Acts
• legal action against broker/dealer, registered representatives, or individual who commits acts of fraud or violates Securities Act while selling munis

Required for new accounts

• customer name and address
• of legal age?
• Social Security #
• occupation
• name/address of employer
• if customer works for another broker/dealer?
• financial status
• tax status
• investment objectives
• beneficial owners name and address  
• authorization to transmit account info for official communications on account (Rule G-15)
• signature of registered rep
• signature of municipal securities principal or branch office manager of the branch

When accounts are opened for employees of other firms

• written notice MUST be sent to employer
• copies of confirmations of securities transactions must be sent to the employer
• any other instructions from the employer must be followed
• each order does NOT need to be authorized by the employer
• recommendations must be suitable
• discretionary account-customer gives broker/dealer the right to buy and sell without consulting with customer before entering the order
• all quotes must be fair and equitable, does NOT have to be best price

Municipal bond delivery

• new issue settlement date set by syndicate manager, usually set at time bonds are offered
• 3 day regular way
• same day, cash trades happen that day
• bond not in default-gets accrued interest up to but not including settlement date
• bond in default, trades flat with NO accrued interest
• MUST be in good deliverable form
• registered bond must have owner sign bond
• NOT mutilated
• if bearer bond, coupons MUST be attached
• MUST have legal opinion attached or be sold ex-legal
• coupon, bond #, maturity date must be readable 
• CUSIP #(tracking#) does NOT have to be readable
• certificate of authentication, from trustee if above items aren't readable

municipal bond confirmations to dealer

• sent to contra dealer, dealer on other side of the trade
• identification & description of trade
• description of bond
• par value of bond
• if bonds callable-can be redeemed before maturity
• if new issue, selling concession
• if book entry only

municipal bond confirmations to customer

• description of security
• trade date
• settlement date
• dollar amount of transaction
• accrued interest
• lower of YTM-at discount or YTC-at premium
• whether firm acted as agent of principal for transaction
• name of previous owner or offer to provide name upon request

stripped bond

• exempt-maturity date
• exempt-par value
• needed-final payment date
• needed maturity value 

What is regular way delivery for a municipal bond purchased in the secondary market?

• three days
• regular way delivery for a municipal bond bought in the secondary market 

Municipal principal

• supervises activities of registered representatives
• supervise email and correspondence of RR to customer 
• opening of municipal accounts before munis are bought/sold
• any muni order before or on day order is entered
• official statement CAN be sent without principal's signature

MSRB representatives

• take test within 90 days of being hired, must pass within first 9mo or be fired
• 90 day apprenticeship before they can sell securities
• Series 52 pass-can sell municipal and government securities
• Series 7-sell everything except commodities 
• NO customer trades till test passed and apprenticeship
• RRs can act as financial advisors and traders 
• RRs can underwrite
• RRs cannot supervise other RRs
• principals supervise RRs
• NO customer gifts>$100
• if fee charged, firm's financial interest in security must be disclosed 
• if firm underwrote bond, must disclose if firm was part of underwriting syndicate

Correspondence and advertising

• communication<25 customers to buy or sell municipal securities
• reprint of existing article
• info from research department
• info RR wrote

sales literature

• notices
• circulars
• municipal securities reports
• telemarketing scripts
• article reprints
• abstracts/summaries of official statement

Sales literature DOES NOT include

• official statement
• preliminary official statements
• listings of dealer offerings

Advertising by municipal joint account

• MUST include names of all members on account
• account agrees to price-buy or sell securities
• refer ONLY to agreed price
• ONLY show agreed price
• when syndicate gets bonds, customer gets settlement within 60 days 
• joint account a.k.a selling syndicate
• banks, mutual funds sometimes want to buy/sell a large block of municipal bonds
• broker/dealer is hired to buy /sell for institutions and municipal joint account-other firms help fill order
• if institutional investor sells bonds, municipal joint account sell bonds to their own investors MUST be at same price
• if institutional investor wants to purchase bonds, muni joint account members may solicit their customers, MUST do trade at same price and same time give names of other members of joint account

control relationship

• must tell customers  of control relationship before buy,sell,exchange
• firm must send written disclosure before order
• if disclosure is not provided before order, must be provided when transaction occurs
• firm can't do transaction in a discretionary account with control relationship exists unless customer wants trade 

arbitration

• customer can initiate arbitration against a broker/dealer in a dispute
• broker dealer CANNOT initiate arbitration against customer unless a customer agrees to it

mediation

• rarely used
• nothing binding

litigation

• least used
• most costly

Who must approve all correspondence regarding municipal bonds when sent by a registered representative to a customer?

• Municipal securities principal