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Broker Obligations When Selling Municipal Bonds

When Selling Municipal Bonds What are the Broker’s Obligations

Many brokers and customers mistakenly believe that municipal bonds are always a “safe” place to be.  The recent debacle in Puerto Rico proves this is not the case.

The law imposes special obligations upon brokers who sell municipal bonds.

First, the broker must thoroughly research the municipal bond that he or she is recommending to the client.   This goes far beyond merely knowing the credit rating of the bond.   Instead, brokers must perform an independent analysis.   They must obtain and review all material information that is publicly available through sources such as the Electronic Municipal Market Access System, also known as EMMA.  They must also obtain and review information that is not generally available to the public through established industry resources such as research reports, press releases and other data provided by independent sources.   This is all spelled out in FINRA Regulatory Notice 10–41.

Once the broker thoroughly researches the bond, the broker must make a suitable recommendation to the client.  This means the bond must be appropriate for the amount of risk that the client wants to take.  Not all municipal bonds are “safe.”   Many are downright junk.

Next, even if the broker has thoroughly researched the bond and believes it is suitable, the broker must nonetheless speak to the client and disclose all material facts to the customer at the time of the trade.  Material facts are those that would be important to a reasonable investor in making an investment decision.   Material facts include facts known only to the broker and facts that are reasonably accessible to the market.   It is not enough for the broker to point a customer to the internet or to EMMA.  The broker must have a conversation with the investor about the material factors affecting the bond.

Moreover, these facts must be disclosed at the time of the trade.   It is not sufficient to disclose material facts after the trade has already taken place.

These obligations are governed by the Municipal Securities Rulemaking Board (MSRB) Rules G–17, G–19, and G-47.

Unfortunately, many clients learn about these obligations after the fact. They mistakenly assume their broker has been acting in their best interest when in fact that is not the case.   The broker has done very little research other than to find which product will pay him or her the highest commission.

If you have been victimized by a dishonest financial advisor or stockbroker, contact our firm for a free consultation at 877-915-4040.