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Series 50 practice questions

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Question 1Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB rules, a municipal advisor owes a fiduciary duty to its municipal entity client. Which statement best describes that duty?

  1. Act in the client's best interest, placing the client's interest ahead of the firm's. Correct answer.
  2. Ensure that any recommendation is suitable for the client's investment objectives and financial situation.
  3. Balance the client's interest against the firm's obligation to the market.
  4. Follow the client's written instructions without offering independent judgment.

Explanation

Rule G-42 imposes a fiduciary duty on municipal advisors, made up of a duty of loyalty and a duty of care, requiring the advisor to act in the client's best interest without regard to its own interests.

Question 2Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor is engaged by a city to advise on a revenue bond issue. The finance director asks the advisor to also review the underwriter's proposed fee structure and tell the underwriter whether it is acceptable. To whom does the advisor's fiduciary duty run?

  1. To the city alone, as the municipal entity client. Correct answer.
  2. To the bondholders, who ultimately provide the financing.
  3. To the city and the underwriter equally, because both are parties to the financing.
  4. To the underwriter, once the advisor begins reviewing the underwriter's fees.

Explanation

A municipal advisor's fiduciary duty runs to its municipal entity client. Underwriters, obligated persons, and bondholders are not clients, although the advisor must still deal fairly with them under Rule G-17.

Question 3Standards of Conduct, Fiduciary Duty, and Professional Ethics

When must a municipal advisor disclose a conflict of interest to its municipal entity client in connection with an engagement?

  1. Only if the conflict is later determined to be material to the transaction.
  2. In writing at or before the time of engagement, and promptly when a new conflict arises. Correct answer.
  3. Verbally at the first client meeting, with written confirmation required only for principal transactions.
  4. Only if the client asks about potential conflicts during the engagement.

Explanation

Rule G-42 requires the municipal advisor to disclose conflicts of interest, and other information the client needs to evaluate the relationship, in writing at or before the time of engagement, and to disclose newly arising conflicts promptly.

Question 4Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor's engagement letter with a school district states that the firm 'provides services as an independent contractor and does not act as a fiduciary.' How does this provision affect the advisor's obligations?

  1. It is ineffective; the firm still owes the fiduciary duty imposed by MSRB rules. Correct answer.
  2. It is effective as long as the client is represented by counsel.
  3. It converts the relationship to a suitability-based standard, because the client agreed.
  4. It limits the fiduciary duty to the specific financing named in the letter.

Explanation

The fiduciary duty arises from MSRB rules and cannot be eliminated by a contractual disclaimer. The firm remains obligated to act in the municipal entity's best interest regardless of the engagement letter's language.

Question 5Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-37, when a covered associate of a municipal advisory firm contributes to an official of an issuer, the firm generally may not do which of the following?

  1. Solicit municipal advisory business from that issuer for six months after the contribution.
  2. Provide compensated municipal advisory services to that issuer for two years. Correct answer.
  3. Employ the covered associate for two years after the contribution.
  4. Provide advisory services to any issuer in the same state for two years after the contribution.

Explanation

Rule G-37 bars a municipal advisory firm from providing municipal advisory services for compensation to an issuer for two years after a covered associate makes a contribution to an official of that issuer who has authority over the issuer's municipal securities.

Question 6Standards of Conduct, Fiduciary Duty, and Professional Ethics

A covered associate of a municipal advisory firm wants to contribute to the re-election campaign of a mayor. The mayor is an official of an issuer that is considering engaging the firm, and the covered associate is entitled to vote for the mayor. Under the Rule G-37 de minimis exception, the largest contribution that avoids the ban is:

  1. $250 Correct answer.
  2. $100
  3. $500
  4. $150

Explanation

The de minimis exception permits contributions of up to $250 to officials for whom the covered associate is entitled to vote, and up to $150 to other covered officials, without triggering the two-year prohibition.

Question 7Standards of Conduct, Fiduciary Duty, and Professional Ethics

Which individual is a 'covered associate' of a municipal advisory firm for purposes of Rule G-37?

  1. An independent consultant retained by the firm to review draft disclosure documents.
  2. A back-office operations clerk who processes invoices and never contacts clients.
  3. A marketing employee who solicits municipal advisory business from issuers. Correct answer.
  4. A former employee who left the firm more than two years ago and has no client contact.

Explanation

Covered associates include partners, managing members, executive officers, and employees who solicit municipal advisory or municipal securities business on behalf of the firm, whether or not they are themselves municipal advisors.

Question 8Standards of Conduct, Fiduciary Duty, and Professional Ethics

MSRB Rule G-20 limits the value of gifts that may be given to an employee of another municipal securities professional to:

  1. $50 per person per year, if disclosed
  2. $25 per person per year
  3. $250 per person per year
  4. $100 per person per year Correct answer.

Explanation

Rule G-20 imposes a $100 per person per year limit on gifts given to employees of other municipal securities professionals and prohibits gifts given in connection with municipal securities business.

Question 9Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisory firm wants to show appreciation to the finance director of a client city. Rather than giving the gift directly, the firm asks its outside counsel to purchase and deliver a $300 watch to the director. Under Rule G-20, this arrangement is:

  1. Permitted, because purchases made by regulated professionals such as outside counsel fall outside the rule.
  2. Permitted, because the firm itself did not give the gift to the director.
  3. Permitted, provided the firm's compliance officer approves the expenditure.
  4. Prohibited, because indirect gifts through third parties are attributed to the firm. Correct answer.

Explanation

Rule G-20 applies to gifts given directly or indirectly, so a gift routed through counsel, an agent, or another intermediary is treated as a gift made by the firm.

Question 10Standards of Conduct, Fiduciary Duty, and Professional Ethics

Rule G-17 requires a municipal advisor to deal fairly with all persons. Which practice does the rule specifically prohibit?

  1. Providing services to more than one municipal entity in the same state.
  2. Charging fees that exceed the industry median for the same service.
  3. Engaging in any deceptive, dishonest, or unfair practice. Correct answer.
  4. Advising a client to pursue a financing structure the advisor has not used before.

Explanation

Rule G-17 requires fair dealing and prohibits municipal securities professionals from engaging in deceptive, dishonest, or unfair practices in connection with their municipal securities activities.

Question 11Standards of Conduct, Fiduciary Duty, and Professional Ethics

Before recommending that a city issue variable-rate demand bonds rather than fixed-rate bonds, a municipal advisor must:

  1. Obtain written pre-approval of the recommendation from the MSRB.
  2. Guarantee that the recommended structure will lower the city's interest costs.
  3. Have a reasonable basis, grounded in due diligence, for the recommendation. Correct answer.
  4. Confirm that at least two other issuers of similar size have completed a comparable transaction.

Explanation

The duty of care in Rule G-42 requires the advisor to have a reasonable basis, grounded in due diligence and analysis of the client's circumstances, for the advice and recommendations it gives.

Question 12Standards of Conduct, Fiduciary Duty, and Professional Ethics

Which information is most relevant to a municipal advisor's duty of care when recommending a financing structure?

  1. The underwriter's inventory of bonds awaiting sale.
  2. The fee schedules published by competing advisory firms.
  3. The advisor's own capital position and appetite for risk.
  4. The client's financial condition, objectives, and constraints. Correct answer.

Explanation

The duty of care requires the advisor to understand the client's financial condition, objectives, and constraints before recommending a financing structure so that the advice is tailored to that client.

Question 13Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisory firm wants to purchase, as principal, a portion of the bonds that its client city is issuing. Under MSRB rules, the firm may do so only if it:

  1. Obtains approval from the MSRB before purchasing the bonds.
  2. Limits its purchase to no more than ten percent of the issue.
  3. Resigns the advisory engagement and waits at least thirty days before purchasing any of the bonds.
  4. Discloses the conflicting role in writing and receives the client's informed consent. Correct answer.

Explanation

Taking a principal position opposite its client creates a direct conflict with the advisor's fiduciary duty. The conflict must be disclosed in writing and the client's informed consent obtained before the transaction, and in many cases the advisor should decline the role altogether.

Question 14Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor recommends that its client city enter into an interest rate swap with a dealer. The dealer has agreed to pay the advisor a marketing fee. What does the advisor's fiduciary duty require?

  1. Accept the fee without disclosure, since dealer-paid fees reduce the city's costs.
  2. Disclose the fee in writing and confirm the swap is in the city's best interest. Correct answer.
  3. Decline the fee, because municipal advisors may not accept compensation from dealers.
  4. Disclose the fee only if the city asks how the advisor is compensated.

Explanation

A fiduciary must disclose every source of compensation connected with its advice in writing, and must still independently determine that the recommended transaction is in the client's best interest despite the third-party payment.

Question 15Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under Rule G-37, which activity by a municipal advisory firm is prohibited with respect to an issuer from which the firm is seeking business?

  1. Contributing to a candidate for state office in a state where the firm currently does no business.
  2. Soliciting contributions from others for an official of that issuer. Correct answer.
  3. Attending a fundraiser at which the issuer's mayor speaks.
  4. Making a personal contribution to a candidate for federal office.

Explanation

Rule G-37 prohibits a firm and its covered associates from soliciting contributions from any person on behalf of an official of an issuer with which the firm is engaging or seeking to engage in municipal advisory business.

Question 16Standards of Conduct, Fiduciary Duty, and Professional Ethics

Which element is required of a municipal advisor's supervisory system under Rule G-44?

  1. Annual audited financial statements filed with the MSRB.
  2. An annual compliance review conducted by the designated compliance officer. Correct answer.
  3. Prior approval by the MSRB staff of all written supervisory procedures before they take effect.
  4. Monthly reporting of all client communications to the MSRB.

Explanation

Rule G-44 requires a municipal advisory firm to maintain a supervisory system and written supervisory procedures, designate a chief compliance officer, and conduct an annual review of its compliance policies and procedures.

Question 17Standards of Conduct, Fiduciary Duty, and Professional Ethics

MSRB recordkeeping rules generally require a municipal advisor to preserve records of its municipal advisory activities for:

  1. Three years
  2. Two years
  3. Six years Correct answer.
  4. Five years

Explanation

MSRB record preservation rules require municipal advisors to keep records of their municipal advisory activities for six years.

Question 18Standards of Conduct, Fiduciary Duty, and Professional Ethics

While advising a city on a negotiated bond sale, a municipal advisor learns that the city will announce a large budget deficit next week. The advisor's firm also trades municipal bonds for its own account. The advisor should:

  1. Purchase bonds of the city for the firm's account before the announcement.
  2. Disclose the information in the firm's next client newsletter as market color.
  3. Keep the information confidential and not use it for the firm's benefit. Correct answer.
  4. Share the information with the underwriter so the pricing reflects the risk.

Explanation

The budget information is confidential client information that is also material. Using it to trade for the firm's account would breach the duty of loyalty, and passing it to third parties or publishing it would breach confidentiality and Rule G-17.

Question 19Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor retains an unaffiliated individual to solicit municipal entity clients on its behalf. Under MSRB Rule G-46, the advisor must:

  1. Have a written agreement with the solicitor and disclose the arrangement to the client. Correct answer.
  2. Pay the solicitor only in cash so that the payment is traceable.
  3. Limit solicitation to municipal entities that have never previously used a municipal advisor.
  4. Obtain MSRB approval of the individual's solicitation script.

Explanation

Rule G-46 requires a written agreement between the municipal advisor and the solicitor and requires the advisor to disclose the solicitor's role and compensation to the municipal entity client, generally with the client's acknowledgment.

Question 20Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisory firm's marketing brochure states that its staff 'are certified by the MSRB.' This statement is:

  1. Acceptable, if the claim appears in a footnote rather than the headline.
  2. Acceptable, if the brochure also lists the firm's registration number.
  3. Acceptable, if the staff have passed a qualification examination.
  4. Prohibited, because it implies MSRB sponsorship or approval. Correct answer.

Explanation

Rule G-17 prohibits material misstatements, and MSRB rules prohibit stating or implying that the MSRB sponsors, endorses, or certifies a firm or its personnel. Passing a qualification examination is a licensing fact, not MSRB certification.

Question 21Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB rules, a municipal advisor must disclose to a municipal entity client in writing:

  1. Material legal or disciplinary events affecting the advisor. Correct answer.
  2. The names of all other clients the firm has advised in the past five years.
  3. The compensation paid to each of the firm's employees on the engagement.
  4. The identity of every dealer that has submitted a bid to the firm in the past year.

Explanation

Rule G-42 requires written disclosure of conflicts of interest and other information the client needs to evaluate the relationship, including material legal or disciplinary events involving the firm or its associated persons.

Question 22Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor provides advice under an oral agreement with a city. What does Rule G-42 require in this situation?

  1. The advisor must terminate the advisory relationship until a written agreement can be signed.
  2. The advisor must file the oral agreement with the MSRB within thirty days.
  3. The engagement is void, because advisory relationships must be in writing.
  4. The advisor must make and keep a record describing the municipal advisory relationship. Correct answer.

Explanation

Rule G-42 requires that the municipal advisory relationship be documented. Where there is no written agreement, the advisor must make and keep a record describing the relationship and its terms.

Question 23Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor's fee is a percentage of the par amount of bonds issued. A city's finance director asks whether the city should refund an existing issue to save interest. The refunding would increase the par amount issued and therefore the advisor's fee. The advisor should:

  1. Recommend the refunding and disclose the fee effect only after the pricing.
  2. Recommend the refunding, because increased par amount generally lowers the city's borrowing cost per dollar.
  3. Evaluate the refunding on its merits for the city and disclose the fee conflict in writing. Correct answer.
  4. Decline to advise, because percentage-of-par fee arrangements are prohibited.

Explanation

The duty of loyalty requires the advisor to put the client's interest ahead of its own compensation. The advisor must analyze the refunding on the merits for the city and disclose the fee conflict in writing before the client decides; a percentage-of-par fee that grows with transaction size heightens that conflict.

Question 24Standards of Conduct, Fiduciary Duty, and Professional Ethics

A city asks its municipal advisor for advice on whether to enter into a commodity swap to hedge fuel costs. The advisory firm has no experience with commodity derivatives. Under its duty of care, the firm should:

  1. Recommend the swap because hedging transactions generally reduce a municipality's budget volatility.
  2. Decline the engagement or obtain the expertise needed before advising. Correct answer.
  3. Recommend the swap and rely on the counterparty to explain the risks to the city.
  4. Provide its best guess and note in the engagement letter that the advice is informal.

Explanation

The duty of care limits an advisor to advice within its competence, or requires it to obtain the necessary expertise before advising. Giving advice outside its expertise, or relying on the counterparty to explain the risks, breaches that duty.

Question 25Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisory firm is soliciting business from a state authority whose chair is a member of a state political party committee. A covered associate of the firm makes a $500 contribution to that state party committee. Under Rule G-37, the contribution is:

  1. Permitted, because the contribution does not exceed $500.
  2. Prohibited, because payments to a state political party count as contributions under the rule. Correct answer.
  3. Permitted, because the recipient is a party committee rather than a candidate.
  4. Permitted, as long as the party committee does not share the funds with the authority's chair.

Explanation

Rule G-37 treats certain payments to state and local political parties as contributions to officials of issuers in that state, so a party-committee payment can trigger the two-year prohibition on compensated municipal advisory business.

Question 26Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB rules, a municipal advisor providing advice to a city on a bond issue owes a fiduciary duty primarily to:

  1. The city Correct answer.
  2. The MSRB
  3. The bond underwriters
  4. The investing public

Explanation

MSRB Rule G-42 establishes that a municipal advisor owes a fiduciary duty to its municipal entity client when providing municipal advisory services. The duty includes obligations of care and loyalty. The advisor does not owe a fiduciary duty to underwriters, regulators, or the general investing public.

Question 27Standards of Conduct, Fiduciary Duty, and Professional Ethics

MSRB Rule G-17 requires a municipal advisor to deal fairly with all persons. This duty prohibits the advisor from:

  1. Charging fees that are higher than competitors' fees
  2. Recommending a financing structure the client dislikes
  3. Disclosing conflicts of interest to the client
  4. Making materially misleading statements to a client Correct answer.

Explanation

Rule G-17 prohibits deceptive, dishonest, or unfair practices, including materially misleading statements and omissions. The duty of fair dealing requires candid disclosure of material facts. Charging a higher fee is not itself prohibited, and disclosing conflicts is required.

Question 28Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisory firm's brochure states that the firm is 'MSRB approved.' This statement is:

  1. Required to be filed with the MSRB before use
  2. Permitted if the firm has no disciplinary history
  3. Misleading because the MSRB does not approve or endorse firms Correct answer.
  4. Permitted because the firm is registered with the MSRB

Explanation

The MSRB is a self-regulatory organization that writes rules and registers firms; it does not approve, endorse, or certify municipal advisory firms. Claiming MSRB approval is a materially misleading statement that violates fair-dealing principles. Registration with the MSRB does not equal approval.

Question 29Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-44, a municipal advisory firm must designate an individual responsible for:

  1. Supervising the firm's compliance with MSRB rules Correct answer.
  2. Auditing the firm's financial statements
  3. Approving all political contributions
  4. Negotiating underwriting fees

Explanation

Rule G-44 requires a municipal advisory firm to establish a supervisory system and designate a compliance officer responsible for its day-to-day supervision. The compliance officer oversees compliance with MSRB rules and the firm's written policies. Political contributions, underwriting fees, and financial audits are not the designated role under G-44.

Question 30Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-42, a municipal advisor must provide required disclosures to a municipal entity client:

  1. Orally, with written confirmation upon request
  2. By posting them on the firm's public website
  3. In writing, before or at the time of engagement Correct answer.
  4. Only after the financing is completed

Explanation

Rule G-42 requires a municipal advisor to disclose conflicts of interest and other material information in writing to the municipal entity client before or at the time of engagement. Oral disclosure alone does not satisfy the rule. Website posting is not a substitute for client-specific written disclosure.

Question 31Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-42, a municipal advisor's duty of care requires the advisor to:

  1. Follow the client's instructions without independent analysis
  2. Recommend only the lowest-cost financing structure
  3. Have a reasonable basis for the advice and recommendations provided Correct answer.
  4. Guarantee the success of the recommended financing

Explanation

The duty of care requires a municipal advisor to exercise reasonable diligence and have a reasonable basis for its advice and recommendations. It does not require guaranteeing outcomes or automatically choosing the lowest-cost structure. The advisor must exercise independent professional judgment.

Question 32Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor has a financial interest in an underwriting that it is recommending to its client. Under MSRB rules, the advisor must:

  1. Obtain MSRB approval before proceeding
  2. Resign from the advisory engagement
  3. Donate the underwriting profits to charity
  4. Disclose the conflict in writing to the client Correct answer.

Explanation

Rule G-42 requires written disclosure of conflicts of interest so the municipal entity client can evaluate the advice. Disclosure does not always require resignation, but the conflict must be managed. The MSRB does not pre-approve individual conflicts.

Question 33Standards of Conduct, Fiduciary Duty, and Professional Ethics

Which action by a municipal advisor best demonstrates professional integrity?

  1. Recommending a costlier product to increase commissions
  2. Declining to disclose a conflict to preserve client trust
  3. Using confidential client information for personal trading
  4. Correcting an invoice error that reduces the advisor's fee Correct answer.

Explanation

Professional integrity involves honesty and placing the client's interests ahead of the advisor's own. Correcting an error that reduces the advisor's fee reflects candor and fairness. Misusing confidential information, hiding conflicts, and self-dealing are ethical violations.

Question 34Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor learns that a software vendor will pay it a referral fee for recommending the vendor's budgeting tool to city clients. Under MSRB rules, the advisor must:

  1. Disclose the referral fee and its conflict to the client in writing Correct answer.
  2. Refuse the referral fee because all third-party payments are prohibited
  3. Disclose the referral fee only if the client asks
  4. Pass the referral fee to the client as a credit

Explanation

Rule G-42 requires a municipal advisor to disclose conflicts of interest, including compensation from third parties, in writing to the client. The advisor must also disclose the source and amount of third-party compensation. Not all third-party payments are prohibited, but they must be disclosed and managed.

Question 35Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-37, if a municipal advisory firm makes a prohibited political contribution to an issuer official, the firm is subject to:

  1. A $10,000 fine but no business restriction
  2. Permanent debarment from municipal advisory activities
  3. A one-year suspension of its MSRB registration
  4. A two-year prohibition on municipal advisory business with that issuer Correct answer.

Explanation

Rule G-37 prohibits a municipal advisory firm from engaging in municipal advisory business with an issuer for two years after a prohibited political contribution to an issuer official. The rule is designed to prevent pay-to-play. Fines may also apply, but the central consequence is the two-year business prohibition.

Question 36Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-44, a municipal advisory firm's supervisory system must be:

  1. Reviewed only after a client complaint
  2. Designed to prevent and detect violations of MSRB rules Correct answer.
  3. Limited to registered representatives
  4. Outsourced to a third-party compliance firm

Explanation

Rule G-44 requires a supervisory system reasonably designed to achieve compliance with MSRB rules and to prevent and detect violations. The system must be tailored to the firm's business and cannot be limited to certain employees. Review only after a complaint would be too late.

Question 37Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-42, a municipal advisor's written agreement with a city client must include:

  1. The names of all potential underwriters
  2. A guarantee of the bond's credit rating
  3. A description of the services and the fees to be charged Correct answer.
  4. The advisor's political contribution history

Explanation

Rule G-42 requires a written agreement that describes the municipal advisory services to be provided and the compensation to be paid. It also addresses conflicts and other disclosures. The agreement does not guarantee ratings or list every potential underwriter.

Question 38Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor recommends a competitive bond sale, and the advisor's affiliate is one of the bidding underwriters. What must the advisor do?

  1. Bid on the bonds itself
  2. Recommend a negotiated sale instead
  3. Disclose the affiliate relationship in writing and manage the conflict Correct answer.
  4. Withdraw from the engagement automatically

Explanation

An affiliate relationship with a bidding underwriter is a conflict of interest that must be disclosed in writing and managed so that the advice remains objective. Automatic withdrawal is not always required. The advisor should not manipulate the sale method or bid unless properly authorized and disclosed.

Question 39Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor gives a $150 watch to an issuer official's spouse. Under MSRB Rule G-20, this gift is:

  1. Permitted because the spouse is not the issuer official
  2. Prohibited because it exceeds the gift limit Correct answer.
  3. Prohibited only if the advisor intended to influence the official
  4. Permitted if the official later discloses it

Explanation

Rule G-20 limits gifts to $100 per person per year and treats indirect gifts, including gifts to family members, as gifts to the official. A $150 watch to the official's spouse exceeds the limit. Intent to influence is not required for the rule to apply.

Question 40Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor tells a client that a bond structure is 'the only option' when several suitable alternatives exist. This conduct most likely violates:

  1. Rule G-20
  2. Rule G-17 Correct answer.
  3. Rule G-44
  4. Rule G-37

Explanation

Rule G-17 prohibits materially misleading statements and unfair dealing. Describing a structure as the only option when alternatives exist is misleading and deprives the client of informed choice. G-20 governs gifts, G-37 political contributions, and G-44 supervision.

Question 41Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor recommends an interest rate swap without analyzing the city's ability to meet potential collateral postings. This most likely violates the advisor's:

  1. Duty of fair dealing
  2. Duty of confidentiality
  3. Duty of loyalty
  4. Duty of care Correct answer.

Explanation

The duty of care requires reasonable diligence and analysis of the risks and suitability of a recommendation. Failing to analyze collateral postings is a failure of care. Loyalty concerns conflicts, confidentiality concerns client information, and fair dealing concerns honesty in communications.

Question 42Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisory firm's covered associate makes a permitted de minimis political contribution. Under MSRB Rule G-37, the firm must:

  1. Record the contribution and the recipient's name Correct answer.
  2. Refund the contribution within ten days
  3. Obtain MSRB approval before the contribution
  4. Publicly disclose the contribution on its website

Explanation

Rule G-37 requires municipal advisory firms to keep records of political contributions by covered associates, including the recipient and amount. The MSRB does not pre-approve contributions, and public website disclosure is not the required recordkeeping method. A permitted contribution need not be refunded.

Question 43Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor receives material nonpublic information about a client's upcoming bond downgrade. The advisor may:

  1. Use it only to advise the client and not disclose or trade on it Correct answer.
  2. Post it anonymously online
  3. Trade on the information for its own account
  4. Share it with a friendly underwriter

Explanation

Material nonpublic information obtained through an advisory relationship must be kept confidential and may be used only to serve the client. Trading on it or sharing it for trading violates fiduciary duty and insider-trading prohibitions. Anonymous posting is still an improper disclosure.

Question 44Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor is asked to advise on a type of financing in which it has no experience. Under MSRB Rule G-42, the advisor should:

  1. Delegate the advice to the underwriter
  2. Charge a lower fee to offset the risk
  3. Accept the engagement and learn on the job
  4. Disclose the limitation and recommend added expertise Correct answer.

Explanation

The duty of care requires the advisor to have the competence and reasonable basis to provide the advice. If the firm lacks expertise, it should disclose that limitation and recommend that the client obtain additional qualified expertise. Learning on the job or delegating to an interested underwriter is not adequate.

Question 45Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor recommends a financing structure that pays it a higher fee but is not in the client's best interest. This most likely violates the advisor's:

  1. Rule G-37
  2. Duty of care only
  3. Duty of loyalty Correct answer.
  4. Rule G-20

Explanation

The duty of loyalty requires the advisor to act in the client's best interest and not subordinate the client's interests to its own compensation. Recommending a structure solely to increase fees is a loyalty breach. G-20 and G-37 address gifts and political contributions, not this self-dealing.

Question 46Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisory firm's covered associate makes a $300 contribution to the campaign of a state treasurer who can influence the selection of municipal advisors. The firm has an existing advisory contract with the state. Under MSRB Rule G-37, what is the consequence?

  1. The firm may continue if it discloses the contribution promptly
  2. The firm must refund the contribution and pay a civil fine
  3. The firm must terminate the existing contract within 30 days
  4. A two-year advisory compensation ban with the state Correct answer.

Explanation

Rule G-37 prohibits a municipal advisory firm from receiving compensation for municipal advisory services to an issuer for two years after a prohibited contribution by a covered associate. The prohibition applies even if the firm already has a contract. Disclosure or refunding the contribution does not avoid the two-year ban.

Question 47Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-42, a municipal advisor may not enter into a contract with a municipal entity client that provides for compensation contingent on:

  1. Transaction size or timing Correct answer.
  2. The client's credit rating
  3. The number of meetings held
  4. The advisor's hourly costs

Explanation

Rule G-42 prohibits compensation that is contingent on the size or timing of the municipal securities transaction because it can create incentives to recommend a larger or differently timed issue. Hourly costs, credit ratings, and meeting counts are not the prohibited contingency. The rule targets transaction-based incentives.

Question 48Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisor discovers a conflict of interest that cannot be reasonably managed. Under fiduciary principles, the advisor should:

  1. Increase its fee to compensate for the risk
  2. Obtain the client's written consent after full disclosure
  3. Decline the engagement or withdraw from it Correct answer.
  4. Disclose the conflict and continue the engagement

Explanation

A fiduciary must avoid conflicts that cannot be reasonably managed; if such a conflict exists, the advisor should decline or withdraw. Disclosure and consent may suffice for manageable conflicts, but not where the conflict is unmanageable. Increasing fees does not resolve the conflict.

Question 49Standards of Conduct, Fiduciary Duty, and Professional Ethics

Under MSRB Rule G-44, a municipal advisory firm's supervisory system must cover:

  1. Only employees who directly advise clients
  2. Only the compliance officer
  3. Solicitors acting on the firm's behalf Correct answer.
  4. Only the firm's registered representatives

Explanation

Rule G-44 requires the supervisory system to cover the firm's municipal advisory activities and the persons acting on its behalf, including solicitors. Supervision cannot be limited to registered representatives or only direct advisors. The compliance officer administers the system but is not the only person covered.

Question 50Standards of Conduct, Fiduciary Duty, and Professional Ethics

A municipal advisory firm wants to hire an individual who, within the past two years, made a prohibited political contribution while employed by another advisory firm. Under MSRB Rule G-37, the hiring firm:

  1. Must report the individual to the MSRB
  2. May face the same two-year ban as a covered associate Correct answer.
  3. Is automatically banned from business with the affected issuer
  4. Is not affected because the contribution was made at another firm

Explanation

Rule G-37's prohibitions attach to covered associates and can follow an individual to a new firm. If the individual becomes a covered associate, the hiring firm may be subject to the two-year prohibition for the issuer affected by the prior contribution. The rule looks at the contribution and the individual's status, not only the prior employer.