MUNICIPAL 

SECURITIES

Overview of Market 

Structure, Pricing, and 

Regulation

Report to Congressional Committees

January 2012

GAO-12-265

United States Government Accountability Office

GAO
 United States Government Accountability Office 

Highlights of GAO-12- 265, a report to 

congressional committees 

January 2012 

MUNICIPAL SECURITIES 

Overview of Market Structure, Pricing, and 

Regulation 

Why GAO Did This Study 

Municipal securities are debt 

instruments that state and local 

governments typically issue to finance 

diverse projects. Individual investors, 

through direct purchases or investment 

funds, own 75 percent of the estimated 

$3.7 trillion in municipal securities in 

the U.S. market. In the secondary 

market, where these securities are 

bought and sold after issuance, trading 

largely occurs in over-the-counter 

markets that are less liquid and less 

transparent than the exchange-traded 

equity securities market. The DoddFrank Wall Street Reform and 

Consumer Protection Act required 

GAO to review several aspects of the 

municipal securities market, including 

the mechanisms for trading, price 

discovery, and price transparency. This 

report examines (1) municipal security 

trading in the secondary market and 

the factors that affect the prices 

investors receive, and (2) the 

Securities and Exchange 

Commission’s (SEC) and selfregulatory organizations’ (SRO) 

enforcement of rules on fair pricing and 

timely reporting. For this work, GAO 

analyzed trade data, reviewed federal 

regulators’ programs for enforcing 

trading rules, and interviewed market 

participants and federal regulators. 

What GAO Recommends 

GAO recommends that SEC collect 

and analyze information on SROs’ 

fixed-income regulatory programs on 

an ongoing basis to better inform its 

risk-based inspection approach. SEC 

agreed, but noted it would need 

additional resources to conduct more 

frequent oversight of the SROs. Such 

ongoing monitoring, however, could 

help SEC better leverage its resources 

for inspections. 

What GAO Found

In the secondary market for municipal securities, both institutional and individual 

investors trade through brokers, dealers, and banks (broker-dealers). However, 

GAO analysis of trade data showed that institutional investors generally trade at 

more favorable prices than individual investors. Broker-dealers said these 

differences generally reflected the higher average transaction costs associated 

with trading individual investors’ smaller blocks of securities. Market participants 

added that institutional investors have more resources, including networks of 

broker-dealers, and the expertise to independently assess prices. In recent 

years, the Municipal Securities Rulemaking Board (MSRB)—an SRO that writes 

rules regulating the broker-dealers that trade municipal securities—has required 

timely and public posting of trade prices in an effort to make post-trade price 

information more widely available. However, unlike the equities market, the 

relatively illiquid municipal market lacks centrally posted and continuous quotes, 

and other sources of pretrade price information are not centralized or publicly 

available to individual investors. In 2010, SEC began a review of the municipal 

securities market, in part to examine pretrade price information. MSRB has also 

begun a study that includes a review of the market structure to determine 

whether access to additional pretrade price information could improve pricing and 

liquidity. Both SEC and MSRB plan to complete these studies in 2012. 

Several regulators share responsibility for overseeing the municipal securities 

market. The Financial Industry Regulatory Authority (FINRA)—an SRO that 

regulates 98 percent of the broker-dealers that trade municipal securities—and 

federal banking regulators enforce broker-dealer compliance with MSRB rules 

under their respective jurisdictions through electronic surveillances of trade data 

and routine examinations. SEC evaluates the quality of FINRA and MSRB’s 

municipal regulatory programs through its SRO inspection program, which has 

recently evolved to a risk-based approach. SEC last inspected MSRB and 

FINRA’s fixed-income surveillance program, which encompass municipal 

securities trading, in 2005. SEC staff said that staffing constraints have 

prevented them from conducting inspections of these SROs sooner, although 

they have recently begun a new inspection of FINRA’s fixed-income surveillance 

program. SEC’s limited monitoring of FINRA and MSRB between inspections 

may not be sufficient to support its new risk-based inspection approach. For 

example, SEC’s last inspection of FINRA’s fixed-income surveillance program 

predated the financial crisis—and its ensuing volatility in the municipal market—

but SEC had collected limited information since its last inspection that would help 

it assess the quality of FINRA’s broker-dealer oversight. SEC currently receives 

periodic reports from FINRA that provide statistical information on its regulatory 

activities related to municipal securities trading. According to SEC staff, while 

they might be able to use the reports to identify significant deviations in FINRA’s 

efforts, they cannot use them solely to determine the effectiveness of FINRA’s 

municipal securities program. Without ongoing collection and analysis of 

information to assess the effectiveness of SROs’ regulatory programs, SEC may 

be unable to identify and act on regulatory problems in a timely manner. 

View GAO-12-265 For more information, 

contact A.Nicole Clowers at (202) 512-8678 or 

clowersa@gao.gov. 
Page i GAO-12-265 Municipal Securities 

Letter 1 

Background 4

Municipal Securities Are Priced in an Opaque Market That Favors 

Better-Informed Participants 11

Regulators Oversee Compliance with MSRB Rules and Have Not 

Found Systemic Violations, but SEC’s Monitoring Is Limited 30

Conclusions 48

Recommendation for Executive Action 49

Agency Comments and Our Evaluation 49

Appendix I Potential Uses, Risks, and Oversight of Derivative Products in the 

Municipal Securities Market 51

Appendix II Scope and Methodology 56

Appendix III GAO Analysis of MSRB Trade Data, 2005-2010 65

Appendix IV Municipal Securities Rulemaking Board Expenses and Revenues 

Related to the Market Information Transparency Programs 70

MSRB Increased the Transaction Fee and Levied a New 

Technology Fee to Generate Additional Revenues 74

Appendix V Selected SEC Cases and Opinions Involving Excessive Municipal 

Securities Markups and Markdowns 77

Appendix VI Regulators’ Policies and Procedures for Monitoring Compliance with 

MSRB Rules G-30 and G-14 78

Appendix VII Comments from the Securities and Exchange Commission 83

Contents
Page ii GAO-12-265 Municipal Securities 

Appendix VIII GAO Contact and Staff Acknowledgments 85

Tables 

Table 1: Average Relative Prices on Newly Issued Fixed-Rate 

Municipal Securities, by Trade Amount, 2010 17

Table 2: Example of Broker-Dealer Spreads’ Effects on the Yields 

to Maturity Received by an Individual and an Institutional 

Investor 18

Table 3: Average Price Dispersion for Newly Issued Fixed-Rate 

Municipal Securities, 2010 19

Table 4: Factors That Regulators Consider in Determining BrokerDealers’ Compliance with MSRB Rule G-30 39

Table 5: Number of OCIE Market Oversight Staff, Fiscal Years 

2005-2011 46

Table 6: Percentage Change in Relative Price per 1 Percent Change 

in Trade Amount, by Trade Type and Year, 2005-2010 66

Table 7: Percentage Change in Spread per $10,000 Increase in 

Trade Amount, by Year, 2005-2010 68

Table 8: Change in Price Dispersion per $10,000 Increase in Trade 

Amount (in Basis Points), by Trade Type and Year, 2005-

2010 69

Table 9: MSRB Expenses, Fiscal Years 2004-2010 72

Table 10: MSRB Revenues, Fiscal Years 2004-2010 73

Table 11: Selected SEC Cases and Opinions Involving Excessive 

Municipal Securities Markups and Markdowns, 1970-2011 77

Figures 

Figure 1: Hypothetical Broker-Dealer Markups and Markdowns in 

Municipal Securities Transactions 32

Figure 2: MSRB Revenues and Expenses, Fiscal Years 2004 through 

2010 74
Page iii GAO-12-265 Municipal Securities 

Abbreviations

ATS alternative trading system

CEA Commodity Exchange Act

CFTC Commodities Futures Trading Commission

CUSIP Committee on Uniform Security Identification Procedures

DTC Depository Trust Company

DTTC Depository Trust and Clearing Corporation

EMMA Electronic Municipal Markets Access

ERISA Employee Retirement Income Security Act of 1974

FDIC Federal Deposit Insurance Corporation

FINRA Financial Industry Regulatory Authority

MSIL Municipal Securities Information Library

MSRB Municipal Securities Rulemaking Board

NASD National Association of Securities Dealers

NBBO National Best Bid and Offer

NBER National Bureau of Economic Research

NSCC National Securities Clearing Corporation

OCC Office of the Comptroller of the Currency

OCIE Office of Compliance Inspections and Examinations

OTC over-the-counter

RTRS Real-Time Transaction Reporting System

RTTM Real-Time Trade Matching

SEC Securities and Exchange Commission

SIFMA Securities Industry and Financial Markets Association

SMMP Sophisticated Municipal Market Professional

SRO self-regulatory organization

SSRN Social Science Research Network

STAR System for Tracking Activities for Regulatory Policy and 

Oversight

STARS Super Tracking and Reporting System

YTM yield to maturity

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Page 1 GAO-12-265 Municipal Securities 

United States Government Accountability Office 

Washington, DC 20548

January 17, 2012

The Honorable Tim Johnson

Chairman

The Honorable Richard C. Shelby

Ranking Member

Committee on Banking, Housing, 

 and Urban Affairs

United States Senate

The Honorable Spencer Bachus

Chairman

The Honorable Barney Frank

Ranking Member 

Committee on Financial Services

House of Representatives

Municipal securities are debt instruments that state and local 

governments issue to finance transportation, housing, hospitals, 

education, and diverse other projects. The market for these securities is 

worth an estimated $3.7 trillion, with individuals holding 75 percent of the 

total outstanding, either indirectly through investment funds or directly 

through purchases with broker-dealers.1 But the size, heterogeneity, and 

other characteristics of this market create challenges, especially in terms 

of pricing. For example, municipal securities are traded primarily through 

decentralized, dealer-mediated, over-the-counter (OTC) markets that 

provide less liquidity and less price transparency than other securities 

markets, such as the exchange-traded equity market.2

 

1

Federal Reserve Flow of Funds Accounts of the United States, December 8, 2011. This 

figure comprises securities held directly by individual investors (51 percent) or through 

investment management companies such as mutual funds, money market mutual funds, 

closed-end funds, and exchange-traded funds (24 percent). Insurance companies and 

commercial banks hold most of the remaining securities

There is no central 

facility that publicly posts quotes on all securities trading, as there is in 

some equities markets. The relative lack of pretrade transparency in the 

2

Liquidity refers to the relative ability of a security to be readily convertible into cash 

without substantial transaction costs or reduction of value. Price transparency refers to the 

degree to which information regarding quotations for securities (pretrade transparency) 

and the prices and volume of transactions (post-trade transparency) is made publicly 

available in the securities market. 

 
 

Page 2 GAO-12-265 Municipal Securities 

municipal securities market has raised questions about whether individual 

investors, that is, those who buy and sell securities for themselves directly 

through broker-dealers, have sufficient price information to make wellinformed investment decisions regarding the securities they wish to buy 

and sell in the secondary market, where municipal securities are traded 

after they are issued.

The Municipal Securities Rulemaking Board (MSRB) is a self-regulatory 

organization (SRO) that writes rules regulating the brokers, dealers, and 

banks (collectively referred to as broker-dealers in this report) that 

underwrite, sell, and trade municipal securities.3 MSRB has also issued a 

number of rules governing municipal trades. Among other things, these 

rules require broker-dealers to trade municipal securities for their investor 

customers at fair and reasonable prices and to report their municipal 

trades in a timely and accurate manner. However, MSRB does not have 

the authority to enforce these rules and relies instead on the Financial 

Industry Regulatory Authority, Inc. (FINRA)—an SRO for broker-dealers, 

federal banking regulators, and the Securities and Exchange Commission 

(SEC). SEC also provides oversight of MSRB and FINRA.4

Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act) required us to review several aspects of the 

municipal securities market, including the mechanisms for trading, trade 

reporting, price discovery, clearance and settlement, and transparency, 

as well as the potential uses of derivatives in this market.5

 

3

SROs are exchanges and associations that operate and govern the markets, and that are 

subject to oversight by the Securities and Exchange Commission.

Accordingly, 

the objectives of this report are to (1) analyze how investors trade 

municipal securities in the secondary market and the factors affecting the 

prices they receive, and (2) determine how federal regulators enforce 

MSRB rules to help ensure fair and reasonable prices for investors and 

the timely and accurate reporting of municipal trades, including recent 

4

Section 977 of the Dodd-Frank Act contains a provision that requires MSRB, FINRA, and 

SEC to meet at least twice a year to discuss their respective work in the regulation of 

municipal securities trading and to share information about their respective rules and 

examination and enforcement activities related to municipal securities. Pub. L. No.111-

203, § 975(b)(5), 124 Stat. 1376, 1920 (2010).

5

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 

§977, 124 Stat. 1376, 1924 (2010). 
 

Page 3 GAO-12-265 Municipal Securities 

trends in the enforcement of these rules. We address the potential uses 

of derivatives by municipal issuers in appendix I of the report.

To address municipal security trading in the secondary market, we 

analyzed MSRB trade data from the Real-Time Transaction Reporting 

System (RTRS)—the system to which broker-dealers report their municipal 

securities trades—for the period from 2005 to 2010. In so doing, we 

reviewed information from MSRB on the policies and procedures it used to 

ensure that the data were complete and accurate and determined that the 

data were reliable for our purpose. In addition, we reviewed studies and 

industry literature. We interviewed members of trade organizations 

representing institutional investors (mutual funds and other investment 

management companies, insurance companies, and banks that possess or 

control considerable assets for large-scale investing), broker-dealers 

(including broker’s brokers), and individual investors; officials from 

independent municipal market research and advisory firms; and officials 

from SEC’s Office of Municipal Securities and MSRB.6

To address the regulators’ enforcement of rules on fair pricing and timely 

reporting, we reviewed MSRB rules and draft rules related to the pricing 

of municipal securities, trade reporting, and clearance and settlement of 

municipal securities transactions. We reviewed MSRB data from RTRS 

on the number of trades that MSRB determined were reported late for 

each year from January 2005 to July 2011. We reviewed documentation 

related to FINRA’s programs for surveilling RTRS data for potential 

violations of MSRB pricing and trade reporting rules and examination 

procedures used by FINRA, federal banking regulators, and SEC’s Office 

of Compliance Inspections and Examinations (OCIE) to assess brokerdealers’ compliance with these rules. We reviewed samples of municipal 

broker-dealer examinations conducted from 2002 to 2010 by OCIE and 

from 2006 to 2010 by FINRA and federal banking regulators. In addition, 

we reviewed OCIE’s guidance for conducting SRO inspections and 

We attended and 

viewed SEC’s field hearings on the state of the municipal securities market. 

We also received demonstrations of and interviewed officials from an 

alternative trading system (ATS) specializing in the electronic trading of 

municipal securities and of Bloomberg, L.P. (Bloomberg), which provides 

information and other services related to municipal securities trading.

 

6

A broker’s broker is a broker-dealer that executes securities transactions exclusively with 

other broker-dealers. 
 

Page 4 GAO-12-265 Municipal Securities 

reviewed the most recent inspections of MSRB and FINRA’s fixed-income 

program conducted in 2002 and 2005.

7

We conducted this performance audit from November 2010 to January 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. Appendix II 

provides a more detailed description of our scope and methodology.

We also reviewed OCIE’s 2009 

inspections of two SROs that clear and settle municipal, corporate, and 

equity securities transactions—the Depository Trust Company (DTC) and 

the National Securities Clearing Corporation (NSCC). Further, we looked 

at relevant documentation pertaining to coordination among the SEC, 

FINRA, MSRB, and federal banking regulators—the Board of Governors 

of the Federal Reserve System (Federal Reserve), the Federal Deposit 

Insurance Corporation (FDIC), and the Office of the Comptroller of the 

Currency (OCC)—in conducting oversight of the municipal securities 

market and interviewed officials from these entities.

The municipal securities market comprises both primary and secondary 

markets. In the primary market, underwriters buy new securities from 

municipal issuers (e.g., local government entities) and subsequently sell 

them to investors during the primary offering.8

 

7

The fixed-income inspections we reviewed were of the National Association of Securities 

Dealers (NASD), which formerly acted as the SRO for broker-dealers. In July 2007, NASD 

assumed the broker-dealer regulatory functions of the New York Stock Exchange and 

became FINRA.

Municipal securities that 

trade after the primary offering are said to trade in the secondary market, 

8

An underwriter is a broker-dealer that purchases a new issue of municipal securities for 

resale in a primary offering. Often a group of underwriters, known as an underwriting 

syndicate, forms to purchase new issues. The underwriting spread is the difference 

between the amount underwriters pay an issuer for its securities and the amount they 

receive from selling the securities in the primary offering. 

Background
 

Page 5 GAO-12-265 Municipal Securities 

with both institutions and individuals participating.9 Institutional investors 

typically trade municipal securities in amounts of $1 million or more and 

generally are in the market full-time to provide or preserve income as well 

as maximize investment returns for their clients or firms. In contrast, 

individual investors typically trade municipal securities in amounts of 

$100,000 or less and access the market relatively infrequently, with the 

intent to buy and hold securities until maturity.10

Many individual investors find municipal securities an attractive 

investment option because of the tax advantages these intruments offer. 

Unlike the dividends on equity securities (which also trade in a market 

with considerable individual investor participation), the interest on most 

municipal securities is exempt from federal income tax and, in some 

cases, from state or local income tax.11

 

9

Institutional investors participate in the primary market by buying large blocks of 

municipal securities directly from the underwriters. Individual investors may be able to 

participate in the primary market, particularly—but not exclusively—if the issuer 

establishes a retail order period. During a retail order period, underwriters or the 

underwriting syndicate seeks orders only from retail customers. Issuers determine 

whether a primary offering will have a retail order period, the length of the retail order 

period, and who qualifies as a retail customer. Underwriters told us that some issuers 

defined retail customers as individuals but might also include entities that represent 

individuals, such as trusts.

In addition, as debt instruments 

municipal securities are generally considered less risky than equity 

securities. For example, issuers of debt securities have a contractual 

obligation to return the principal value of the security to the holder at 

maturity, while issuers of equity securities do not. Further, issuers of debt 

securities also have a contractual obligation to pay investors a fixed or 

10Although MSRB trade data do not distinguish between individual and institutional 

investors, most broker-dealers we spoke with said that their individual investor clients 

trade in amounts of $100,000 or less. Our analysis of MSRB trade data showed that in 

2010 about 82 percent of dealer sales to investors of newly issued fixed-rate bonds were 

for $100,000 or less and that about 97 percent of all such trades were for $1 million or 

less. However, individual investors can make larger trades; for example, one brokerdealer we interviewed said some of the firm’s individual customers buy $250,000 to $1 

million blocks of municipal securities.

11For interest on a municipal security to qualify as exempt from the investor’s gross 

income for federal income tax purposes, the issuer must meet a number of requirements 

in the federal income tax code and regulations. Some taxable municipal securities were 

issued in 2009 and 2010 under the Build America Bonds program adopted as part of the 

American Recovery and Reinvestment Act of 2009. An issuer may also issue taxable 

securities if the purpose of the issuer’s financing does not meet certain public purpose or 

public use tests under the federal tax rules, such as in the case of private activity bonds. 
 

Page 6 GAO-12-265 Municipal Securities 

variable rate of interest income. On the other hand, dividend payments to 

shareholders of equity securities are decided by the company’s board of 

directors.

Data on the number of municipal issuers and outstanding municipal 

securities are not officially tracked by regulators or the private sector. 

Third-party information vendors provide a range of estimates; data we 

obtained from one indicated the municipal securities market has over 

46,000 municipal issuers, including states, counties, cities, towns, and 

state and local government agencies, among others, and at least 1.1 

million securities outstanding.12 In contrast, about 5,700 public companies 

list their equity securities for trading on the major U.S. exchanges.13 Each 

municipal issuance is unique, with its own credit structure, terms, and 

conditions.14 Most outstanding municipal securities trade infrequently—for 

example, in 2010 about 99 percent of outstanding municipal securities did 

not trade on any given day.15

The municipal securities market is geographically fragmented, with 

secondary market trading supported by national and regional brokerdealer firms that serve institutional investors (institutional broker-dealers) 

or individual investors (retail broker-dealers), and in some firms, both. 

Several national broker-dealer firms have enough capital and geographic 

The heaviest trading of municipal securities 

typically occurs immediately following their issuance, after which trading 

becomes sporadic.

 

12As of October 3, 2011, Bloomberg tracked over 46,000 municipal issuers and obligors 

as well as 1,138,405 outstanding unique municipal securities, as identified by their 

Committee on Uniform Security Identification Procedures (CUSIP) numbers. Generally, a 

CUSIP number uniquely identifies municipal securities in each maturity for a given primary 

market issuance. 

13We obtained data on the number of companies listed on the New York Stock Exchange, 

the NASDAQ Stock Market, and the NYSE Amex as of December 31, 2010, from the 2010 

annual reports of NYSE Euronext and NASDAQ QMX. 

14For example, municipal bonds can have a “put,” or “tender,” feature, giving the investor 

the right to surrender the securities to the issuer at specified dates and at a predetermined 

price (usually par), or a “call” feature that gives issuers the right to call, or redeem, a 

security prior to the stated date of maturity. 

15We derived this statistic by dividing 15,051 (the average daily number of unique 

municipal securities traded in 2010, according to MSRB) by 1,138,405 (the number of 

outstanding municipal securities as of October 3, 2011, according to Bloomberg). 

Municipal Securities and 

Secondary Market 

Structure
 

Page 7 GAO-12-265 Municipal Securities 

presence to underwrite large new issuances nationwide, trade in large 

volume with institutional investors, and offer expertise in virtually every 

sector of the market.16

The fact that the average municipal security is traded infrequently 

indicates that generally ready buyers and sellers are not available. Thus, 

some broker-dealers provide liquidity for their investors by committing 

capital to maintain their own inventories. In doing so, these broker-dealers 

can offer investors securities when they want to buy and buy securities 

when investors want to sell. Broker-dealers may also facilitate trades 

taking little or no risk on their own capital by purchasing or selling 

securities in order to fulfill prearranged orders.

Some midsized broker-dealer firms also have 

nationwide coverage for institutional and individual investors on a smaller 

scale. But other broker-dealer firms provide inventory and expertise in 

well-defined geographic areas, allowing them to serve individual 

investors—many of whom invest in municipal securities to enjoy state or 

local income tax benefits—as well as institutional investors who need 

access to local markets. Given the heterogeneity and variety of municipal 

securities available, the fact that they are traded infrequently, and the 

geographic fragmentation of the market, broker-dealers typically work 

with their customers to find available securities that fit preferred 

parameters (e.g., geographic location, yield, credit quality, or price) 

instead of specific securities.

17

 

16According to MSRB, the top 10 underwriting firms underwrote over 70 percent of primary 

market issuance volume (by par amount) in 2010 and in 2011. Additionally, the top 10 

broker-dealer firms executed about 55 percent of secondary market trades in 2010 and 

2011, and the top 200 broker-dealer firms accounted for 98 percent of all municipal trade 

volume (by par amount) in 2010 and 2011. The remaining approximately 1,600 firms were 

less active in the municipal securities market as they were not primarily engaged in 

municipal securities underwriting, research, or trading.

In addition to trading 

securities from their own inventories, broker-dealers communicate and 

trade securities with other broker-dealers directly to expand the pool of 

securities that they may offer investors and to find potential buyers for 

their securities. Such communication can also help them identify market 

supply and demand trends on particular securities. Broker-dealers 

generally communicate with each other directly by phone or through 

Bloomberg, which connects its users through e-mail, instant text, and 

17Most broker-dealers execute trades as the principal by trading securities from their 

proprietary accounts. 
 

Page 8 GAO-12-265 Municipal Securities 

other features that allow users to share information on and post offerings, 

obtain and provide bids on securities, and conduct research and analysis.

Broker-dealers may also use broker’s brokers and electronic trading 

platforms to trade in the secondary market. Currently, about 20 broker’s 

brokers promote additional liquidity and facilitate information flow in the 

municipal securities markets by specializing in segments of the market (by 

region, issuer, or type of security) and helping broker-dealers find buyers 

for their securities in their areas of expertise.18 They do so primarily by 

arranging auctions called bid wanted procedures (bids wanted) for brokerdealers that are selling securities, particularly in unfamiliar areas of the 

market.19 Broker-dealers can also buy and sell municipal securities for their 

customers through electronic trading platforms that combine inventories 

from market participants, typically broker-dealers, into one location, thus 

enabling users—mostly broker-dealers and, in some cases, institutional 

investors—to search for, buy, and sell municipal securities from a single 

site. Some of these trading platforms focus on trading for the individual 

investor market. However, individual investors typically do not have direct 

access to these trading platforms, although they may have indirect access 

through a retail broker-dealer.20

 

18Broker’s brokers execute transactions primarily with broker-dealers for a fee and do not 

maintain proprietary inventories of securities. Municipal broker’s brokers are registered as 

such through MSRB. Other over-the-counter fixed-income markets also use interdealer 

brokers to facilitate transactions in the secondary market.

19In a broker’s broker bid wanted, the broker’s broker typically disseminates information 

about the securities for sale electronically and then contacts various broker-dealers by 

phone to solicit bids (institutional Investors and broker-dealers can also customize their 

own bids wanted through Bloomberg). Besides arranging bids wanted, broker’s brokers 

told us that they might facilitate situation trading, which is generally used for institutionalsized trades. In situation trading, broker’s brokers find buyers for a broker-dealer’s 

securities at a prespecified price set by the broker-dealer. 

20The electronic trading platforms that broker-dealers told us they regularly used were 

registered with SEC as ATSs under Regulation ATS. The regulation defines an ATS as an 

organization, association, person, group of persons, or system that provides a 

marketplace or facility that brings together buyers and sellers of securities or otherwise 

performs the functions commonly performed by a stock exchange. However, the ATS 

does not set rules governing the conduct of the subscribers other than its ATS trading 

activities, nor does it discipline subscribers other than by excluding them from trading. 
 

Page 9 GAO-12-265 Municipal Securities 

About 1,800 securities firms and banks are registered with MSRB as 

broker-dealers of municipal securities. As an SRO, MSRB develops rules 

for broker-dealers engaged in underwriting, trading, and selling municipal 

securities with the goals of protecting investors and issuers and 

promoting a fair and efficient marketplace.21

SEC has designated FINRA as the entity responsible for conducting 

surveillance of trade data from RTRS for potential violations of MSRB 

rules. FINRA employs automated surveillance in its compliance 

monitoring that is programmed to review RTRS data for potentially 

excessive prices and late trading, among other rule violations. FINRA 

staff review alerts generated by automated surveillance systems to 

identify those that warrant further investigation. When FINRA finds 

evidence of potential violations of these rules involving those brokerdealers who are its members, it can take action ranging from informal 

warnings to the imposition of monetary fines to expulsion from its 

membership, among other sanctions. FINRA refers potential violations 

involving bank dealers to the appropriate federal banking regulator. 

During the period of our review, FINRA and the federal banking regulators 

conducted routine examinations of the firms under their jurisdiction once 

To further its mandate to 

protect investors, MSRB also operates information systems designed to 

promote post-trade price transparency and access to municipal securities 

issuers’ disclosure documents. MSRB provides this access free of charge 

through its Electronic Municipal Markets Access (EMMA) website. As we 

have seen, FINRA and federal banking regulators enforce MSRB rules for 

broker-dealers under their respective jurisdictions. FINRA oversees 98 

percent of those MSRB-registered broker-dealers that are also registered 

members of FINRA, while federal baking regulators oversee the 

remaining 2 percent.

 

21MSRB also writes rules regulating municipal advisers that provide advice to or on behalf 

of municipal entities or obligated persons with respect to municipal financial products, the 

issuance of municipal securities, and certain solicitations of municipal entities and 

obligated persons. Nearly 200 registered broker-dealers, as well as over 500 other firms, 

are registered with MSRB as municipal advisers. 

Municipal Market 

Regulation
 

Page 10 GAO-12-265 Municipal Securities 

every 2 years for compliance with MSRB rules, pursuant to MSRB 

requirements.22

OCIE administers SEC’s nationwide examination and inspection program. 

OCIE oversees the SROs’ compliance with federal securities laws and 

the SROs’ enforcement of their members’ compliance with federal 

securities laws and SRO rules through inspections. Inspection review 

areas include an SRO’s compliance, examination, and enforcement 

programs. OCIE also directly assesses broker-dealer compliance with 

federal securities laws through examinations such as cause and riskbased examinations. If examiners identify compliance findings during 

broker-dealer examinations, they may assess the quality of any recent 

FINRA examinations of the broker-dealer and provide oversight 

comments to FINRA.

SEC’s Office of Municipal Securities is a separate office within the Division 

of Trading and Markets that coordinates SEC’s municipal securities 

activities, advises on policy matters relating to the municipal security 

market, and provides technical assistance in the development and 

implementation of major SEC initiatives in the municipal securities area. In 

addition, the Office of Municipal Securities reviews and processes rule 

proposals filed by MSRB and acts as SEC’s liaison with MSRB, FINRA, 

and a variety of industry groups on municipal securities issues. SEC’s 

Division of Enforcement (Enforcement) investigates possible violations of 

securities laws, recommends commission action when appropriate, either 

in a federal court or before an administrative law judge, and negotiates 

settlements. In January 2010, Enforcement created the Municipal 

Securities and Public Pensions Unit, which focuses on misconduct in the 

municipal securities market and in connection with public pension funds.

 

22On December 16, 2011, SEC approved a MSRB proposed rule change that included an 

amendment to MSRB Rule G-16, which had required FINRA and the federal banking 

regulators to examine broker-dealers at least once every 2 calendar years to determine 

their compliance with all applicable MSRB rules, as well as other SEC rules and 

regulations. The amended rule allows for up to a 4-year examination cycle for FINRA 

member firms, consistent with FINRA’s existing requirement for examinations cycles for all 

other FINRA members. According to MSRB, broker-dealer firms that present higher risks 

would be likely examined on an annual basis, while other firms would be examined every 

2 to 4 years, depending on the risks they presented. Cycle examination frequencies for 

FINRA member broker-dealer firms would be reassessed at least on an annual basis. 
 

Page 11 GAO-12-265 Municipal Securities 

Because of the heterogeneity of the issuers and the securities they issue, 

the large number of securities outstanding, and the infrequency with 

which these securities trade, the municipal securities market does not 

maintain reliable tradable quotes on all outstanding municipal securities.23

Consequently, broker-dealers we spoke with said they use a variety of 

information to determine the prices at which they are willing to buy and 

sell securities. We found that institutional investors traded at more 

favorable prices than individual investors and were generally better 

equipped to make independent assessments of the value of a security. 

SEC, MSRB, and market participants have been considering ways to 

improve pretrade price transparency.

As we have seen, the large municipal securities market, with its many 

issuers and infrequent trades for a given security, does not have readily 

available, transparent information on the prices of securities. Municipal 

broker-dealers generally determine the prices at which they are willing to 

trade by making relative assessments of a security’s market value, drawing 

on various sources of information and incorporating their compensation for 

facilitating the trades.24

 

23In contrast, in the equities market, tradable quotes are readily available for all securities 

listed on the exchanges. Under SEC rules, broker-dealers that sell equity securities to 

individual or institutional investors must guarantee the National Best Bid and Offer 

(NBBO)—the best available ask price when the security is purchased and the best 

available bid price when it is sold. The NBBO is updated throughout the day to show the 

highest bid and lowest offers for all equity securities on all exchanges and market makers 

and is publicly available. In the municipal securities market, pricing evaluation services 

provide daily estimates for most outstanding securities to subscribers. However, 

participants said that they used these estimates primarily to assign values to municipal 

securities portfolios and did not generally consider them executable trade prices in the 

face of alternative sources of reliable and timely information.

Several factors that broker-dealers we spoke with 

identified as relevant to their pricing determinations included (1) recent 

post-trade price information on same or comparable securities, (2) 

available pretrade price information on the security or comparable 

securities, (3) the characteristics and credit quality of the security, (4) 

relevant market information, and (5) the cost of trading the security.

24MSRB Rule G-30 requires that broker-dealers charge investors fair and reasonable 

aggregate prices. For most municipal securities trades, these prices reflect the market 

value of the security, trading costs, and the compensation that the broker-dealer receives 

on the transaction. 

Municipal Securities 

Are Priced in an 

Opaque Market That 

Favors BetterInformed Participants

Among Other Factors, 

Broker-Dealers Use 

Information on Similar 

Securities to Assess the 

Relative Value of a 

Security and Determine 

Its Price
 

Page 12 GAO-12-265 Municipal Securities 

First, when determining prices, broker-dealers said they often began by 

reviewing recent post-trade information on the same or similar securities. In 

2005 MSRB began requiring broker-dealers to report price data on most 

municipal securities transactions within 15 minutes to RTRS and, in 2008, 

made this post-trade pricing information freely available on the EMMA 

website.25 Broker-dealers we spoke with said that the price of a recently 

reported interdealer trade for a security was a particularly good indication of 

its value for that segment of the market.26

These broker-dealers also said that they frequently used industry 

benchmarks—typically yield curves—-constructed in part from the posttrade prices of selected securities as a reference for pricing similar 

securities.

However, if a security has not 

traded recently, they said they instead look for recent trades in comparable 

securities. Broker-dealers we spoke with also said they typically access 

MSRB’s trade data through Bloomberg, which makes available tools to 

perform advanced searches and analytics on the data.

27

 

25MSRB has been taking steps over a number of years to improve post-trade price 

transparency in the municipal securities markets. Prior to 1995, there was no systematic 

and comprehensive dissemination of either post-trade or pretrade information for 

municipal securities. In 1995, MSRB began next-day public dissemination of certain trades 

between broker-dealers. By 2003, MSRB was collecting and disseminating price data on 

all municipal securities transactions the morning after the trade date, but this information 

was not available to the general public. Real-time trade reporting began in 2005 with the 

implementation of RTRS and public dissemination of these data in 2008. 

Representatives of broker-dealers we interviewed explained 

that post-trade information provided them with an understanding of realtime trends in the demand for similar types of securities. For example, a 

major electronic trading platform offers several tools for assessing the 

prices of its listed offerings using post-trade information. Users can see 

recently reported trades for similar securities, compare the offer price with 

a widely used benchmark curve, and receive alerts if the offering price 

exceeds the most recently reported trade by a specified threshold.

26Market participants and regulators explained they used these trades because trades 

between broker-dealers do not include compensation, which broker-dealers include in the 

aggregate price of a security when they trade with investors. 

27A yield curve is a graph plotting the yields for securities of the same quality with

maturities ranging from the shortest to the longest available. One commonly used 

benchmark yield curve plots yields for highly rated state general obligation securities. The 

curve allows users to compare bonds with different maturities and characteristics. For 

example, if three different securities offer yields below, at, and above the appropriate 

benchmark yields, respectively, the broker-dealer can use her judgment to decide whether 

or not these differences are warranted. 
 

Page 13 GAO-12-265 Municipal Securities 

Second, broker-dealers may use available pretrade price information on 

the same or similar securities to infer market value. In the absence of 

tradable quotes for outstanding securities, pretrade price information in 

the municipal securities market includes bids from bids wanted and offer 

prices. However, unlike post-trade information, pretrade price information 

is not centralized, not publicly available, and not as available to brokerdealers (and to other market participants) as post-trade price information. 

To estimate the market value for a security they want to sell, brokerdealers may solicit bids—or may ask a broker’s broker to solicit bids—

through a bid wanted. Broker’s brokers may also provide broker-dealers 

with otherwise publicly unavailable information on third-party bids and 

offers from past bids wanted as well as the highest bid and the lowest 

offer available at a given time for securities in their areas of expertise. For 

example, a broker’s broker who regularly puts a security out for bid 

wanted can provide information to broker-dealers on the bids received 

even if the security has not traded in the last 2 months. Additionally, 

broker-dealers obtain information about offer prices mainly through their 

relationships and daily communications with other broker-dealers or 

broker’s brokers, their investors who may inform them of competing 

offers, and listed offerings on electronic trading platforms or Bloomberg.

Third, information on the credit quality of a security may affect its market 

value, particularly any changes to the credit quality of the security since it 

last traded. Broker-dealers can infer the credit quality of a security by 

reviewing information from issuers’ financial disclosures posted on the 

EMMA website, which they typically access via Bloomberg. Issuer 

disclosures that may affect a security’s market value include information 

on principal and interest payment delinquencies, changes in credit 

ratings, and unscheduled draws on debt service reserves reflecting 

financial difficulties, among other factors. Broker-dealers stated that their 

ability to understand the credit risk of a particular security rested primarily 

on their ability to obtain timely, comprehensive issuer disclosures. 

However, they noted that municipal issuers’ disclosures are sometimes 
 

Page 14 GAO-12-265 Municipal Securities 

outdated and incomplete.28 They added that conducting an independent 

assessment of the credit quality of municipal securities has become 

increasingly important given the decline in the availability and use of bond 

insurance following the recent financial crisis.29

Fourth, broker-dealers identified overall market conditions and events as 

important factors to consider when inferring the market value of a 

security. For example, an increase in interest rates since the last time a 

security has traded will, other things being equal, reduce its value.30

 

28There are no direct federal requirements on municipal issuers to produce or disseminate 

specific items of disclosure to the marketplace. Instead, the municipal securities disclosure 

regime is based on a combination of indirect disclosure obligations established through 

broker-dealers’ role as underwriters in primary market issuances and voluntary issuer 

disclosures. Market participants have expressed frustration regarding the resulting lack of 

uniformity in the completeness and timeliness of issuer disclosures available in the 

municipal market, particularly in the secondary market. Section 976 of the Dodd-Frank Act 

also requires us to report on issues related to disclosure requirements for municipal 

issuers by July 2012, and this work is ongoing. 

Another important factor broker-dealers consider is overall supply and 

demand. For example, broker-dealers we interviewed told us that they 

monitored the primary market because investor demand for new issues 

affects prices for similar securities in the secondary market. Brokerdealers also told us that by being visible and frequently transacting in the 

market, they could maintain continuous dialogue with their customers 

about prices, helping to gauge the interest of investors and other brokerdealers in certain securities at given prices. Finally, broker-dealers said 

that external factors such as “headline risk”—the risk that a news story 

29Bond insurance provides securities with the rating of the bond insurer and guarantees 

investors timely interest payments and, if the issuers default, the return of principal. 

Market participants we spoke with agreed that the widespread use of bond insurance prior 

to the recent financial crisis significantly simplified the process of determining trade prices. 

The homogenization of the credit quality of most municipal securities allowed market 

participants to rely primarily on the creditworthiness of these few monoline insurers 

instead of assessing the credit quality of the underlying securities. However, during the 

recent financial crisis, many of these insurers suffered financial losses brought on by their 

exposure to troubled mortgage-backed securities and were subsequently downgraded. 

According to Thomson Reuters data in the 2006 and 2011 Bond Buyer Yearbook, in 

2005, nine highly rated bond insurers insured about 57.1 percent of new issue volume (or 

51 percent of newly issued securities). By 2010, there was only one active bond insurer in 

the market, providing insurance to approximately 6.2 percent of new issue volume (or 12 

percent of newly issued securities).

30Interest rates increases tend to lower a security’s value because its discounted cash 

flows (that is, the value of future expected cash receipts at a common date) fall as interest 

rates increase. 
 

Page 15 GAO-12-265 Municipal Securities 

will affect prices in a market—can also affect prices in the municipal 

securities market. An example of headline risk cited by broker-dealers we 

interviewed was a December 2010 report by a financial markets analyst 

predicting widespread defaults among municipal issuers. This report 

caused many individual investors to withdraw their money from these 

funds, in turn depressing prices.

Fifth, in determining prices, broker-dealers we spoke with said they 

typically consider trading costs associated with every municipal securities 

trade, such as fees to MSRB, and operational costs. They said that in 

general, it is less costly for broker-dealers to trade a given volume of 

securities in a few large blocks than in a large number of small blocks. 

For example, an institutional broker-dealer with a $2 million block of 

securities to sell may have to find only one buyer for the securities, while 

a retail broker-dealer with a similar block of securities might have to find 

100 individual investors to purchase these securities in smaller blocks of 

$20,000. They explained that the higher costs related to the smaller 

trades include not only the time and other related costs of finding many 

more interested buyers, but also the risk that the broker-dealer incurs in 

holding the securities in his inventory during that time. Last, brokerdealers we spoke with told us that they could spend considerable 

amounts of time with individual investors explaining the characteristics 

and relative risks of the securities, answering questions, and complying 

with regulatory requirements that govern broker-dealer transactions with 

individual investors. In contrast, they said they do not have to spend as 

much time with institutional investors, who are typically more 

knowledgeable and experienced market participants. In order to be 

profitable, broker-dealers consider these costs when establishing prices.

These broker-dealers also noted that they used their professional 

judgment to determine the weight of any factor in determining the price for 

a security, given the facts and circumstances surrounding the transaction. 

For example, while a recent trade price on a similar security may drive a 

security’s trade price in one case, the same information may become less 

relevant in the case of a security that has more recently suffered a credit 

downgrade.
 

Page 16 GAO-12-265 Municipal Securities 

We analyzed MSRB data for secondary market trades involving newly 

issued fixed-rate securities during the period from 2005 through 2010.31

We found that (1) relative to institutional investors, individual investors 

generally paid higher prices when buying—and received lower prices 

when selling—municipal securities; (2) broker-dealers received larger 

spreads (i.e., the difference between the purchase and selling price of a 

security based as a percentage of the purchase price) when trading 

smaller blocks of municipal securities; and (3) the prices that individual 

investors paid for a given security tended to be more dispersed—that is, 

to vary more—than the prices that institutional investors paid.32

First, our analysis revealed that for broker-dealer sales to investors, the 

relative price declined on average with trade amount, and that the 

opposite occurs for broker-dealer purchases from investors.33

 

31MSRB trade prices reflect the aggregate prices that broker-dealers charged or paid 

when selling or buying securities, respectively. For trades with investors, these aggregate 

prices include the compensation that broker-dealers charged or paid investors when 

selling securities to or buying securities from them, respectively. 

That is, 

investors paid higher prices when buying smaller blocks of securities 

from broker-dealers—and received lower prices when selling them—

than they paid or received for larger trades. Table 1 shows average 

relative price for trades involving newly issued fixed-rate securities 

issued in 2010. The table shows that as trade size increased, relative 

prices that investors paid for municipal securities declined steadily and 

relative prices that investors received for selling their securities 

increased steadily. For example, on average, investors paid 101.9 

percent of a security’s reoffering price and received 99.4 percent of a 

security’s reoffering price for $5,000 worth of securities, while they paid 

100.1 percent of a security’s reoffering price and received 100.5 percent 

of a security’s reoffering price for $2 million worth of securities. As 

32For more information on our methodology for this analysis, see appendix II. For 

regression analysis results supporting our findings for all years of analysis (2005-2010), 

see appendix III.

33For each trade, the relative price is the price of the broker-dealer sale or purchase to an 

investor as a percentage of the reoffering price (the price at which newly issued securities 

are sold to the public by the underwriter). The results of our analysis of broker-dealer 

sales to investors were statistically significant at the 1 percent level for all years. The 

results of our analysis of dealer purchases from customers were statistically significant at 

the 1 percent level for all years except 2009. For 2009, the relationship between relative 

trade price and trade amount was negative for dealer purchases from customers but was 

not statistically significantly different from zero. 

Individual Investors 

Generally Trade at Less 

Favorable Prices than 

Institutional Investors
 

Page 17 GAO-12-265 Municipal Securities 

discussed earlier, individual investors typically trade municipal securities 

in amounts of $100,000 or less, and institutional investors typically trade 

in amounts of $1 million or more. Consequently, individual investors are 

likely paying higher prices than institutional investors when they 

purchase municipal securities and receiving lower prices than 

institutional investors when they sell municipal securities.

Table 1: Average Relative Prices on Newly Issued Fixed-Rate Municipal Securities, 

by Trade Amount, 2010

Trade amount

Average relative prices for 

broker-dealer sales to 

Investors (%)

Average relative prices for 

broker-dealer purchases 

from investors (%) a

$1,000-$10,000 101.9 99.4

$10,000-$20,000 101.8 99.6

$20,000-$50,000 101.4 99.7

$50,000-$100,000 100.9 100.1

$100,000-$250,000 100.4 100.1

$250,000-$500,000 100.3 100.3

$500,000-$1 million 100.2 100.4

$1 million-$5 million 100.1 100.5

$5 million and over 100.1 100.5

Source: GAO analysis of MSRB trade data.

a

The relative price on a municipal security is the trade price expressed as a percentage of the 

reoffering price. We analyzed trades that occurred within the period from 30 days prior to 120 days 

after the dated date (date from which interests start to accrue) on municipal securities that had dated 

dates in 2010. We analyzed trades involving fixed-rate securities and excluded trades involving zerocoupon or variable-rate securities. The largest trade in 2010 in the sample was for $6.1 million. 

Our analysis also found that broker-dealers received larger spreads when 

trading small blocks of municipal securities.34

 

34The results were the same for three different measures of spreads—the mean, outside, 

and inside spreads. The mean spread is the difference between the mean price on dealer 

sales and the mean price on dealer purchases to investors as a percentage of the mean 

price on dealer purchases. The outside spread is the difference between the highest price 

on dealer sales and the lowest price on dealer purchases to investors as a percentage of 

the lowest price on dealer purchases. Last, the inside spread is the difference between the 

lowest price on dealer sales and the highest price on a dealer purchases as a percentage 

of the highest price on dealer purchases. Mean, inside, and outside spreads were 

calculated for each security, for each trade size category (trade size was grouped into 

$10,000 increments). Our results were statistically significant at the 1 percent level for all 

three measures of spread for all years. 

 Because individual 
 

Page 18 GAO-12-265 Municipal Securities 

investors tend to trade smaller amounts than institutional investors, 

individual investors tended to pay higher spreads than institutional 

investors. For example, our analysis showed that the average spread for 

a $20,000 trade of a fixed-rate security in 2010 was around 2 percent and 

for a $5 million trade around 0.01 percent. Table 2 shows how these 

spreads affect investors’ return as measured by the yield to maturity (the 

yield received after the security matures) on two hypothetical trades of 

$20,000 and $5 million of the same securities purchased by an individual 

investor and an institutional investor, respectively.

Table 2: Example of Broker-Dealer Spreads’ Effects on the Yields to Maturity Received by an Individual and an Institutional

Investor

Broker-dealer 

retail-sized 

purchase

Broker-dealer sale 

to individual investor 

with 2% spread

Broker-dealer 

institutional-sized 

purchase

Broker-dealer sale to 

institutional investor 

with 0.01% spread

Par value $20,000 $20,000 $5,000,000 $5,000,000

Coupon rate 5.00% 5.00% 5.00% 5.00%

Years to maturity 10 10 10 10

Par value price $100.00 $102.00 $100.00 $100.01

Total price $20,000 $20,400 $5,000,000 $5,000,500

Yield to maturity (YTM) 5.00% 4.75% 5.000% 4.99%

Percentage change in YTM -5.07% -0.03%

Source: GAO.

In addition, our analysis showed a wider range of prices for smaller trades 

than for larger trades from 2005 through 2010. That is, prices for larger 

trades tended to be more concentrated, while prices for smaller trades 

tended to be more dispersed. To the extent that individual investors trade 

smaller amounts than institutional investors, this relationship indicates 

that individual investors were more likely to pay a wider spectrum of 

prices for a given security than institutional investors. Table 3 shows price 

dispersion for trades involving newly issued fixed-rate municipal securities 

issued in 2010. The table shows prices that investors paid (and, to a 

lesser extent, received) for municipal securities were more dispersed for 

smaller trades than for larger trades.
 

Page 19 GAO-12-265 Municipal Securities 

Table 3: Average Price Dispersion for Newly Issued Fixed-Rate Municipal 

Securities, 2010

Trade amount

Average price dispersion for 

broker-dealer sales to 

investors (%)

Average price dispersion for 

broker-dealer purchases 

from investors (%) a

$1,000-$10,000 1.24 0.68

$10,000-$20,000 1.05 0.43

$20,000-$50,000 0.88 0.46

$50,000-$100,000 0.46 0.33

$100,000-$250,000 0.18 0.19

$250,000-$500,000 0.13 0.19

$500,000-$1 million 0.11 0.25

$1 million-$5 million 0.11 0.27

$5 million and over 0.07 0.07

Source: GAO analysis of MSRB trade data.

a

Price dispersion is the difference between the maximum and minimum trade price for a security as a 

percentage of its average trade price. We analyzed trades that occurred within the period from 30 

days prior to 120 days after the dated date on municipal securities with dated dates in 2010. We 

analyzed trades involving fixed-rate securities and excluded trades involving zero coupon or variablerate securities. The largest trade in 2010 in the sample was for $6.1 million. Our results were 

statistically significantly at the 1 percent level for all years. 

These findings are consistent with previous research on municipal 

securities trades. For example, researchers analyzing trades of municipal 

securities found that broker-dealers received larger spreads on smaller 

trades than they received on larger trades.35 In addition, researchers 

analyzing trades of recently issued municipal securities found that prices 

for smaller trades were more dispersed than prices for larger trades.36

 

35See Richard C. Green, Burton Hollifield, and Norman Schürhoff, “Financial 

Intermediation and the Costs of Trading in an Opaque Market,” Review of Financial 

Studies 20(2), March 2007, 275-314; Lawrence E. Harris and Michael S. Piwowar, 

“Secondary Trading Costs in the Municipal Bond Market,” Journal of Finance 61(3), June 

2006, 1361-97; and Securities and Exchange Commission, Offices of Economic Analysis 

and Municipal Securities, Report on Transactions in Municipal Securities, Washington 

D.C., July 1, 2004. Available at www.sec.gov/news/studies/munireport2004.pdf.

36See Richard C. Green, Burton Hollifield, and Norman Schürhoff, “Dealer Intermediation 

and Price Behavior in the Aftermarket for New Bond Issues,” Journal of Financial 

Economics 86 (2007), 643-82; and Securities and Exchange Commission, Report on 

Transactions in Municipal Securities. 
 

Page 20 GAO-12-265 Municipal Securities 

Various factors could contribute to the differences in prices that individual 

investors receive relative to institutional investors. Some researchers

have suggested that these differences are not entirely accounted for by 

differences in dealer costs between large and small trades. One study 

suggests the lower spreads that institutional investors pay may also be

due to the lack of price transparency in the market, which allows better 

informed investors to obtain more favorable trade prices.37 Another study 

adds that institutional investors’ continuous engagement in the market 

and frequent interaction with broker-dealers also provide them with more 

bargaining power than individual investors. This study also suggests that 

the more dispersed prices that individual investors experience could 

indicate that, in the nontransparent municipal securities market, brokerdealers may have more opportunities to charge higher prices when 

dealing with less knowledgeable investors. The authors explained that the 

wider range of prices individual investors receive when they buy or sell 

the same security could reflect broker-dealers’ ability to detect diverse 

levels of sophistication among individual investors, with less 

knowledgeable individuals potentially more likely to trade at less favorable 

prices than more market-savvy individuals.38

A third study, however, concludes that differences in prices are not 

entirely due to the lack of transparency in this market. The study notes 

that municipal securities often pass through a chain of dealers before 

being placed with investors and suggests that such interdealer trading 

may contribute to differences in prices for individual and institutional 

investors. This study finds that the prices investors pay increase with the 

amount of interdealer trading that preceded their purchases, and also that 

more interdealer trading is associated with greater price dispersion. The 

study also finds that successive interdealer trades tend to involve smaller 

 

37See Harris and Piwowar, “Secondary Trading Costs in the Municipal Bond Market.” 

38See Green, Hollifield, and Schürhoff, “Dealer Intermediation and Price Behavior.” Other 

studies have noted potential evidence of broker-dealers’ ability to use their position in the 

market to the detriment of investors. For example, one study suggests that broker-dealers 

exercise their market power by either disregarding crucial disclosure information or 

withholding it from buyers in order to sell securities at higher prices. (See Peter Schmitt, 

The Consequences of Poor Disclosure Enforcement in the Municipal Securities Market, 

DPC Data 2009). Another study suggests that when selling securities, broker-dealers 

opportunistically delay responses to price drops while immediately recognizing price 

increases. (See Richard C. Green, Dan Li, and Norman Schurhoff, “Price Discovery in 

Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?” Journal of 

Finance, Vol. 65 (5), October 2010). 

Individual Investors 

Generally Have Less 

Information and Expertise 

to Assess Prices than 

Institutional Investors
 

Page 21 GAO-12-265 Municipal Securities 

and smaller trades, thus suggesting that investors trading smaller

amounts—individual investors—are likely to pay higher prices and also 

more dispersed prices than investors trading larger amounts—institutional 

investors.39

We found several factors that likely affected individual investors’ ability to 

gain and use information to independently assess offers and bids they 

received from their broker-dealers for municipal securities they were 

interested in purchasing or selling. While MSRB has increased the 

amount of information available to all investors through its EMMA 

website—including price information on past trades and issuer 

disclosures—institutional investors we spoke with generally had more 

resources and expertise to assess prices than individual investors. In 

particular, they had (1) access to more sources of pretrade price 

information in the form of offerings and bids provided through their large 

networks of broker-dealers, (2) access to more user-friendly post-trade 

information through third-party vendors and their networks of brokerdealers, and (3) more market expertise to help them incorporate other 

available information.

First, institutional investors told us that when buying securities they 

accessed the fragmented municipal market through their large networks 

of broker-dealers. For the institutional investors we interviewed, these 

networks range from 30 to over 100 national and regional broker-dealers 

who compete for their business by providing them with a wide range of 

municipal securities offerings from the primary and secondary markets.40

 

39See Paul Shultz, The Market for New Issues of Municipal Bonds: The Roles of 

Transparency and Limited Access to Retail Investors, University of Notre Dame, January 

2012.

For example, institutional investors typically receive daily secondary 

market offerings from their broker-dealers through Bloomberg, which 

provides an interface that allows users to pull together and organize these 

offerings for easy analysis—an important feature in a large, 

heterogeneous market where price discovery depends heavily on relative 

assessments of similar securities.

40Institutional investors we spoke with said that it was their standard practice to maintain 

and trade only through internally approved broker-dealers that were continually reviewed 

for performance and conduct. A couple of investors noted that while they had relationships 

with many broker-dealers, they did the bulk of their trades through about 13 to19 percent 

of them.

Institutional Investors 

Generally Have Access to More 

Sources of Pretrade Price 

Information
 

Page 22 GAO-12-265 Municipal Securities 

Relative to institutional investors, individual investors typically have 

access to fewer sources of pretrade price information. Unlike institutional 

investors that have access to and can compare thousands of daily 

offerings from their large networks of broker-dealers, individuals typically 

have brokerage accounts with a few broker-dealers, perhaps only one, 

that may or may not offer online access to their offerings.41 Individuals 

with online access to a brokerage firm’s offerings can search for 

securities that meet certain parameters and compare the results. They 

may be able to repeat this exercise with other broker-dealers, although 

they are unlikely to obtain competing prices for the same security.42 In 

contrast, some investors without access to online offerings told us that 

they relied on their broker-dealers. These investors can compare prices of 

similar securities only insofar as their brokers share this information with 

them. However, some retail broker-dealer firms have taken steps to 

attract individual investors by combining offerings from electronic trading 

platforms with their own offerings, thus expanding the pool of securities 

available to their customers.43 According to one of the largest municipal 

electronic trading platforms, which caters to retail broker-dealers, 

individuals can access the platform’s inventory through several major 

brokers, most full-service brokers, and many independent financial 

advisers.44

Similarly, institutional investors wanting to sell municipal securities 

generally have multiple ways to obtain pretrade price information in the 

form of bids. Their access to large networks of broker-dealers and tools 

for obtaining bids from more than one dealer allows them to contact 

potential buyers and independently assess the bids they receive for their 

securities. Institutional investors we interviewed said that they also 

 

41For example, of the nine individual investors we spoke with who traded municipal 

securities directly through broker-dealers, four had accounts with one broker, while the 

remaining five used two to four brokers to trade municipal securities (we also interviewed 

two individuals who invested in municipal securities through mutual funds).

42Market participants told us that retail broker-dealers were unlikely to have the same 

securities in inventory because of the variety of municipal securities available and the 

geographic fragmentation of the market, among other things. 

43A broker-dealer that combines offerings with an electronic trading platform may also be 

able to expand by selling securities through other broker-dealer subscribers that may sell 

them to their clients. 

44Full-service brokers provide personalized service to their investors, including research 

and investment advice. 
 

Page 23 GAO-12-265 Municipal Securities 

frequently carried out their own bids wanted by using Bloomberg to solicit 

bids from broker-dealers in order to gauge demand and potentially 

receive a bid at which they were willing to sell.45 Additionally, these 

institutional investors told us that they might offer securities directly to 

broker-dealers to find interested parties among the firms or their 

customers. Finally, institutional investors can ask a broker-dealer to offer 

the security for sale through a broker’s broker or an electronic trading 

platform.46

By contrast, individual investors typically do not have independent access 

to multiple bids and thus may be less able to assess the prices they 

receive for securities they want to sell. When individuals sell securities, 

they typically rely on the broker-dealer responsible for the account that 

houses the securities to find a market. A retail broker-dealer may offer the 

securities to other broker-dealers or customers or may solicit bids through 

a broker’s broker or an electronic trading platform. However, because 

selling small blocks of securities is generally more difficult than selling 

larger blocks, broker-dealers we interviewed said that they might be able 

to obtain only a few bids for the individual investor. Although the brokerdealer may explain to the individual his process for obtaining bids, 

individual investors may have difficulty judging the level of demand for 

their securities or the level of effort their broker-dealers made to find 

potential buyers.

 

45Through Bloomberg, institutional investors can customize their own bids wanted by 

sending out the details of the auction to Bloomberg users of their choice and receiving 

bids. Some institutional investors noted they usually solicited bids from their network of 

broker-dealers, which in turn solicited bids from their own customers. On the other hand, 

institutional investors are not involved in the broker’s brokers’ bids wanted. If a brokerdealer seeks the services of a broker’s broker to sell an institutional investor’s securities, 

the investor receives the anonymous highest bids and can decide to hold or sell the 

securities. 

46Some broker’s brokers offer anonymity by buying the securities from the selling dealer 

and then immediately selling them to another dealer that they lined up prior to executing 

the trade. For example, an institutional investor selling a large block of securities may ask 

a broker’s broker to facilitate the trades and sell the securities in smaller blocks so as to 

maintain a stable price and not reveal the investor’s trading strategy. For other 

transactions that do not require anonymity, broker’s brokers reveal the names of both 

parties at the point of sale.
 

Page 24 GAO-12-265 Municipal Securities 

Similar to broker-dealers, institutional investors we interviewed told us 

that they can access MSRB’s historical trade information through the 

EMMA website and centrally through Bloomberg, which allows users to 

compare post-trade prices for two or more securities that share similar 

characteristics using a search function. Institutional investors also said 

that their established relationships and continued negotiation with their 

broker-dealers often revealed market patterns from post-trade prices that 

helped them assess prices. For example, some large institutional 

investors told us that broker-dealers typically let them know about large or 

otherwise meaningful trades that they believed might affect prices of 

similar securities before these trades appeared on RTRS (postings must 

occur within 15 minutes of the trade). Some of these investors said that 

even though MSRB’s RTRS system did not disclose total transaction 

amounts for trades over $1 million—which the system reports as trade 

amounts of “$1+ million”—they typically were aware of the amount and 

the price of these large transactions through their relationships with 

broker-dealers. Market participants have said that this information is 

important, because prices in large trades affect prices for many other 

similar securities because of the relative nature of pricing in this market. 

Institutional investors are also able to benefit from broker-dealers’ 

commentaries on trades or on demand trends in the market through 

Bloomberg.

In contrast, individuals—who are likely to find Bloomberg prohibitively 

expensive—can obtain post-trade information on any outstanding security 

from the EMMA website but may encounter limitations.47

 

47According to Bloomberg staff, a subscription to Bloomberg services costs about $20,000 

a year.

While individual 

investors may use the EMMA website to look for past trade prices of a 

security to assess the current price, this information is likely not useful 

unless the latest trade is relatively recent, as we have seen. Currently, the 

EMMA website does not have search capabilities designed to allow users 

to identify comparable securities. Further, individual investors could 

misinterpret post-trade pricing data if they were unaware that reported 

prices for investor transactions reflected dealers’ compensation for the 

trade as well as the estimated market value of the security. MSRB is 

Institutional Investors Can 

Access Post-trade Pricing 

Information through the EMMA 

Website, Bloomberg, and Their 

Broker-Dealers 
 

Page 25 GAO-12-265 Municipal Securities 

currently evaluating improvements that would make the EMMA website 

more meaningful and useful for individual investors.48

Institutional investors we spoke with generally employed professional 

staff, such as credit analysts and traders, who specialized in evaluating 

credit risk and trading municipal securities and maintained models to 

evaluate offering prices.49

By contrast, individual investors have access to issuer financial 

disclosures through MSRB’s EMMA website and other publicly available 

issuer information but may lack the expertise to understand and update 

prices using this information. Besides issuer disclosures, individuals have 

access to free investor information websites, such as the Securities 

Industry and Financial Markets Association’s (SIFMA) 

investinginbonds.com, which makes available various market benchmark 

yield curves, among other things. Many of these resources may also be 

available to individuals through their broker-dealers’ online websites. 

However, some institutional investors we spoke with believed that 

professional expertise was required to use this information to assess 

prices, especially for securities that had not traded recently. For example, 

even with timely access to issuer disclosures, it is not clear that individual 

investors with relatively limited market expertise would be able to 

Institutional investors we interviewed stated 

that in general they could form an immediate initial judgment about the 

price of a municipal security because they were entrenched in the market 

on a daily basis and had accumulated expertise to inform their decision 

making. These investors told us that they applied a wealth of market 

history to determine a security’s relative value. They said that, for 

example, they knew the approximate price at which an A-rated hospital 

security in California with a 30-year maturity is trading and could update 

prices for the same or similar securities by looking at technical features 

(like call features), the issuers’ financial profile, and the market strength 

on the day of the trade, among other things.

 

48See appendix IV for a discussion of MSRB’s ongoing assessment of the EMMA website 

and related transparency programs and funding of these programs. 

49These models create benchmark yield curves that allow investors to deem a price 

“cheap,” “fair,” or “rich” if it is below, at, or above the model’s estimated market value. 

Institutional Investors’ Market 

Expertise Allows Them to 

Better Use Available 

Information to Assess Prices
 

Page 26 GAO-12-265 Municipal Securities 

estimate how a rating downgrade translated into a lower price for a 

security.50

Additionally, individual investors may undertake varied degrees of 

research during the few hours that they typically have to make an 

investment decision. For example, some investors we spoke with did not 

look at historical trade information or issuer disclosure information when 

they bought bonds and instead relied on the recommendation of their 

broker-dealer. Others, however, chose a few potential securities from 

their broker-dealer’s online offerings and checked historical trade 

information and disclosure information for those securities. One of the 

more knowledgeable among the individual investors we spoke with stated 

that he treated the last interdealer trade price as a benchmark for pricing 

and used this information with varying degrees of success to negotiate 

prices with brokers. For example, one individual said he had successfully 

used the last traded price to bargain for better prices with his broker and 

found that if he was buying bonds for a par value of $200,000, for 

example, he might be able to save $100 (or 0.05 percent of par value).

Market participants explained that individual investors faced additional 

challenges in independently assessing the value of a security since the 

decline in the use and availability of bond insurance following the recent 

financial crisis. In the past, individual investors could choose to buy an 

insured security and rely on the insurer’s guarantee without fully 

understanding the security’s underlying value. Individual investors may 

review issuer disclosures through the EMMA website to help in 

independently assessing risk, but some individual investors have 

expressed frustration at their inability to identify and understand the 

 

50Certain disclosure, suitability, and fair pricing obligations of a broker-dealer under MSRB

rules may be deemed fulfilled in connection with a transaction between the broker-dealer 

and an investor that constitutes a Sophisticated Municipal Market Professional (SMMP) 

with respect to such transaction. MSRB recently proposed changes to its definition of 

SMMP to include individuals with at least $50 million invested in municipal assets who 

believed and affirmatively attested to their broker-dealers that they could independently 

evaluate investment risks and market value both in general and for specific transactions. 

The previous definition excluded individual investors and included institutional investors 

with at least $100 million invested in municipal securities. The proposal noted that these 

changes were the result of investors’ increased access to electronic trading platforms and 

issuer disclosure information, among others things, as well as the movement to align 

MSRB rules with FINRA rules. See MSRB 2011-63, November 8, 2011.
 

Page 27 GAO-12-265 Municipal Securities 

relevant pieces of information from the typically long and technical issuer 

disclosures.51

SEC and MSRB have ongoing studies examining the municipal security 

market. In May 2010, SEC announced that it was beginning a review of 

the municipal securities markets and intended to examine pretrade price 

transparency, among other issues, using a series of field hearings.52

Discussions to improve pretrade price transparency in the municipal 

securities market focus on whether and how to make bid and offer 

information on municipal securities more widely available and how to 

improve individual investors’ access to the market. In an October 2010 

speech discussing SEC’s review of the municipal securities markets, one 

 At 

the conclusion of the review, SEC staff are to prepare a publicly available 

report recommending whether specific changes to laws, regulation, or 

private sector best practices are needed to better protect municipal 

securities investors. SEC staff anticipate that the report will be finalized 

and made public in 2012. In December 2010, MSRB also announced that 

it was undertaking a study of the municipal securities market, including a 

review of market structure and trading patterns. MSRB stated that the 

study would include a review of transaction costs, price dispersion, and 

other market data and was intended to help MSRB assess whether the 

market was operating as efficiently and fairly as possible. It is also 

intended to assist MSRB in evaluating whether pricing and liquidity in the 

market could be improved with higher levels of pretrade price 

transparency. MSRB staff said that the initial phase of the study would 

likely be completed in 2012. MSRB said that in considering whether to 

recommend potential changes in terms of market structure or disclosures 

that would improve price transparency, the costs and benefits would need 

to be weighed carefully.

 

51As mentioned earlier, while MSRB’s EMMA website provides a central repository of 

issuer disclosure information, MSRB does not have the authority to regulate the content or 

timing of these disclosures. For more information on investors’ concerns with issuer 

disclosures, see the transcript to SEC’s Hearing on the Municipal Securities market, 

December 2010, available at http://www.sec.gov/spotlight/municipalsecurities.shtml. 

52SEC held three hearings on the municipal securities market, including one in San 

Francisco, CA; one in Washington, DC; and one in Birmingham, AL. SEC staff told us that 

SEC originally planned to hold more hearings but were unable to because of budget 

constraints. Instead, staff said that they held a number of “mini muni” hearings, meeting 

with a variety of municipal securities market stakeholders at SEC’s offices.

SEC, MSRB, and Market 

Participants Are 

Considering Ways to 

Improve Pretrade Price 

Transparency
 

Page 28 GAO-12-265 Municipal Securities 

commissioner noted that post-trade transparency in this market had 

improved considerably since MSRB’s implementation of real-time trade 

reporting and the EMMA website.53

One challenge to improving pretrade price transparency is determining 

whether and how to make this information available to the general public 

in a timely manner, particularly for thinly traded securities. That is, given 

that most municipal bonds are traded infrequently once they have been 

initially distributed, two-sided quotes are not continuously available in this 

market. One suggestion that arose was to create a national listing service 

where all municipal broker-dealers could list their entire municipal 

securities offerings for public viewing and allow investors to search for 

securities that fit their investment parameters and to compare prices and 

yields. To make selling securities easier for investors, one field hearing 

participant suggested allowing investors to place bids on offerings, while 

another suggested establishing a limit order mechanism for this market.

However, because of the low liquidity 

levels of many municipal securities, these trade data could be weeks or 

months old and therefore not helpful to investors. In part for this reason, 

the commissioner said, improving pretrade transparency was an 

important goal. MSRB staff observed that only a few limited venues 

allowed even knowledgeable and experienced market participants such 

as broker-dealers to see bid and offer information for municipal trades. 

They added that because the municipal securities market operates 

through over-the-counter trading, even the broker-dealers could not see 

bid and offer information for the entire market.

54

Market participants and observers we spoke to disagreed on the 

feasibility of creating and maintaining a municipal securities exchange. 

Some believed that pricing and liquidity in the municipal securities market 

could be improved through exchange trading, particularly for individual 

These suggestions would necessitate creating a centralized trading 

venue. However, as of January 2012, market participants had not 

developed detailed proposals that describe the feasibility or offer costbenefit analyses of such changes to the structure of the market.

 

53Commissioner Elisse B. Walter, U.S. Securities and Exchange Commission, Key Note 

Address at the National Association of Bond Lawyers (NABL) 35th Bond Attorneys’ 

Workshop. San Antonio, TX, October 28, 2010.

54A limit order is an order to buy or sell a security at a specified price.
 

Page 29 GAO-12-265 Municipal Securities 

investors.55

However, broker-dealers and large institutional investors we interviewed 

stated that, in this fragmented market driven by supply and demand, 

relationships and direct negotiation were the key to making markets and 

determining prices. Broker-dealers also pointed to the large number of 

heterogeneous and relatively illiquid municipal securities that would make 

it difficult to establish ready two-sided markets for a given security. 

Additionally, large institutional investors we spoke with stated that a 

municipal securities exchange may not be feasible or advisable because 

of the costs of developing a central meeting place that could incorporate 

these unique attributes of the market. Broker’s brokers also thought the 

negotiated nature of the market limited the feasibility of an exchange and 

noted that demand for their services had increased greatly with the 

decline in the availability and use of bond insurance. They said that 

because broker-dealers could no longer rely on the homogenizing effects 

For example, one market participant noted that when buying 

securities, broker-dealers and investors currently have access to a limited 

set of offerings in the market, and that when selling securities, they 

currently only have access to a subset of potential bidders for the 

securities. This market participant said that an exchange could broaden 

both broker-dealers’ and investors’ access to bids and offers for municipal 

securities, and that such centralized transparent aggregation of dealer 

and individual investor interest would lead to increased liquidity, even in 

the absence of two-sided quotes for most bonds. Further, this market 

participant said that an exchange would promote pretrade price 

transparency through the public dissemination of bid and offer 

information. Other market participants agreed that an exchange would 

broaden individual investors’ access to the market and noted that an 

exchange would allow them to more easily find offerings for comparable 

securities with the characteristics they wanted. Furthermore, one market 

expert stated that an exchange would provide more liquidity to investors 

by taking advantage of existing technology to identify potential interested 

buyers for a given security, even in the absence of two-sided quotes.

 

55Academic researchers point out that both municipal and corporate securities were 

predominantly traded on the New York Stock Exchange until the 1920s and the 1940s, 

respectively. They argue that the switch from an exchange to an over-the-counter trading 

venue was most likely the result of the concurrent increase in institutional investors’ 

participation in the markets. See Bruno Biais and Richard C. Green, “The Microstructure 

of the Bond Market in the 20th Century,” Institut d’Economie Industrielle Working Paper 

No. 482, August 29, 2007. 
 

Page 30 GAO-12-265 Municipal Securities 

of bond insurance, their need for reliable information on, for example, 

specialized securities’ credit and sector trends had increased.

MSRB has issued rules addressing broker-dealers’ pricing, trade 

reporting, and clearance and settlement responsibilities with respect to 

municipal securities transactions. However, because MSRB does not 

have enforcement authority over broker-dealers, FINRA, federal banking 

regulators, and SEC conduct broker-dealer oversight and enforce MSRB 

rules. FINRA oversees 98 percent of broker-dealers registered with 

MSRB, and the federal banking regulators (OCC, FDIC, and the Federal 

Reserve) oversee the remaining 2 percent, which we refer to in this report 

as bank dealers.56 SEC’s OCIE provides oversight of MSRB and FINRA’s 

regulatory activities. We found that FINRA and the banking regulators did 

not identify many violations of the pricing and trade reporting rules from 

2006 through 2010 and that settlement failures on municipal securities 

transactions were rare.57 We also found that, although OCIE conducted 

multiple FINRA district office inspections and broker-dealer examinations 

as part of its municipal market oversight, it had not inspected MSRB or 

FINRA’s fixed-income program since 2005 and lacked a program for 

conducting interim monitoring to assess risks at these SROs.

Several MSRB rules govern broker-dealers with regard to municipal trade 

pricing, reporting, and clearance and settlement.

• Rule G-30: MSRB Rule G-30 requires that broker-dealers charge fair 

and reasonable aggregate prices to customers (individual and 

institutional investors) for buying and selling securities. In principal 

 

56Some banks designate a department or division to engage in municipal securities 

underwriting, trading, and sales; financial advisory or consultant services for issuers of 

municipal securities; or processing and clearance activities for municipal securities. These 

entities must register as municipal securities dealers with SEC and provide a copy of their 

registration to the appropriate federal banking regulator. As of December 2011, there were 

11 bank dealers under OCC’s jurisdiction, 8 under FDIC’s, and 11 under the Federal 

Reserve’s. However, an OCC staff member told us that the number of municipal securities 

dealers under each banking regulator’s jurisdiction could fluctuate as banks registered and 

withdrew as municipal securities dealers or switched charters among the three banking 

regulators.

57A settlement failure occurs when delivery or receipt of securities does not take place on 

the settlement date for a transaction between two broker-dealers. 

Regulators Oversee 

Compliance with 

MSRB Rules and Have 

Not Found Systemic 

Violations, but SEC’s 

Monitoring Is Limited

MSRB Rules Govern 

Municipal Transaction 

Pricing, Reporting, and 

Clearance and Settlement
 

Page 31 GAO-12-265 Municipal Securities 

transactions, in which broker-dealers take securities into their own 

accounts, the aggregate price reflects not only the market value of the 

security, but also the compensation the broker-dealer receives on the 

transaction, either a markup or markdown from the security’s 

prevailing market price.58

 

58MSRB Rule G-18 addresses a broker-dealer’s responsibility to make a reasonable effort 

to obtain a fair and reasonable price for customers in agency transactions (those in which 

the broker-dealer buys or sells securities on behalf of and under the instruction of another 

party—typically the customer—but does not take any securities into his own account). 

However, Rule G-18 does not address the broker-dealer’s compensation for agency 

transactions, which are in the form of commissions rather than markups or markdowns. 

Rule G-30(b) addresses commissions, which differ from markups and markdowns in that 

they are typically set fees per security or transaction rather than fees based on the 

security’s prevailing market price. A broker-dealer acting in an agency capacity must 

disclose the commission charged to customers as a separate item on the transaction 

confirmation.

A markup is compensation for selling a 

security to a customer, while a markdown is compensation for buying 

a security from a customer. A security’s prevailing market price is its 

interdealer market value—or the price at which a broker-dealer would 

sell or buy the security to or from another broker-dealer—at the time 

of the customer transaction. Most broker-dealers engage in municipal 

securities transactions in a principal capacity, and as such are not 

required to break out the markup or markdown from their aggregate 

prices. Figure 1 shows how markups and markdowns are calculated 

and illustrates the markups and markdowns in hypothetical municipal 

securities transactions. 
 

Page 32 GAO-12-265 Municipal Securities 

Figure 1: Hypothetical Broker-Dealer Markups and Markdowns in Municipal 

Securities Transactions

a

The prevailing market price is not necessarily equivalent to par value, as it is in this example. 

b

This example is based on the assumption that no changes occurred in the market between the 

interdealer transaction and broker-dealer 3’s transactions with investors A and B that would affect the 

prevailing market price. 

MSRB has stated that, in order to be fair and reasonable, the price of a 

security must bear a reasonable relationship to its prevailing market price. 

Both the price and the markup or markdown must be fair and reasonable 

in order to satisfy Rule G-30. In other words, a broker-dealer cannot 

charge the prevailing market price but add an excessive markup and still 

be in compliance with the rule. Citing the heterogeneous nature of 
 

Page 33 GAO-12-265 Municipal Securities 

municipal securities transactions and broker-dealers, MSRB has not set 

specific numeric guidelines for acceptable markups or markdowns.59

• Rule G-14: Since 2005, MSRB Rule G-14 has required real-time 

reporting of most municipal securities trades for transparency and 

regulatory purposes. With few exceptions, Rule G-14 requires brokerdealers to report all trades to an RTRS portal “promptly, accurately, 

and completely.”

Since the early 1970s, however, several SEC cases and opinions have 

addressed instances in which broker-dealers charged excessive 

aggregate prices. Appendix V describes the key features of several of 

these cases.

60 In general, reporting to an RTRS portal entails 

recording transactions and their relevant details within 15 minutes of 

the time of trade.61

• Rules G-15 and G-12: MSRB rules provide for most secondary 

market transactions to settle, or complete delivery and payment, by 

In addition, Rule G-14 states that broker-dealers 

must have a current Form RTRS on file with MSRB with the 

information necessary to ensure that their trade reports can be 

processed correctly.

 

59For a discussion of numeric guidelines related to Rule G-30, see the MSRB Rule Book 

2011, 239 (Report on Pricing, September 26, 1980). Available at 

http://www.msrb.org/msrb1/pdfs/MSRBRulebook.pdf. By comparison, guidance issued in 

connection with FINRA’s rule on fair commissions and markups (IM-2440-1) includes a 

statement that markups and markdowns on securities transactions, which include debt 

securities transactions (bond transactions), generally should not exceed 5 percent. 

However, this guidance is not definitive and, if factored into a markup analysis 

appropriately, is only one of several items considered. IM-2440-1 also states that a higher 

percentage of the markup customarily applies to a common stock transaction than to a 

bond transaction of the same size. 

60There are three ways for broker-dealers to report their trades to the RTRS. First, NSCC 

operates an RTRS portal that may be used for any trade record submission or trade 

modification. Second, broker-dealers can report customer transactions (but not most 

interdealer transactions) to MSRB’s web-based RTRS portal. Third, broker-dealers must 

report most interdealer transactions through NSCC’s Real-Time Trade Matching (RTTM) 

portal, which feeds into the RTRS.

61Rule G-14 provides exemptions to this 15-minute window. For example, dealers have 

until the end of the RTRS business day to report trades in certain short-term (less than 9 

months in maturity) instruments, including variable- rate instruments, auction-rate 

products, and commercial paper. RTRS entries for customer trades require a variety of 

details, such as the CUSIP number, trade date and time, settlement date, par amount and 

dollar price of the trade, the yield (with limited exceptions), and the commission (if 

applicable), as well as whether it was a buy or a sell and a principal or agency transaction. 
 

Page 34 GAO-12-265 Municipal Securities 

the third business day following the trade date. Specifically, MSRB 

Rule G-15 sets out settlement dates with respect to broker-dealers’ 

transactions with customers, while Rule G-12 sets out settlement 

dates for interdealer municipal transactions.

MSRB makes trade data submitted by broker-dealers through the RTRS 

available to FINRA, the federal banking regulators, and SEC for their 

regulatory activities. In January 2010, MSRB launched Regulator Web, or 

RegWeb, a secure web-based portal to municipal securities transaction 

data. RegWeb provides regulators with consolidated access to information 

including real-time, individual firm transaction data as well as dealer data 

quality reports (monthly reports listing each dealer’s late, canceled, and 

amended trade statistics); monthly reports on system outages and other 

statistics; Forms RTRS that firms have filed with MSRB; a list of brokerdealers registered with MSRB; and other information.

FINRA primarily employs an automated surveillance program and conducts 

examinations of broker-dealers to enforce MSRB rules related to pricing 

and trade reporting. FINRA uses automated surveillance to monitor all 

municipal broker-dealers that are FINRA members for compliance with 

MSRB pricing and trade reporting rules. FINRA’s automated surveillance 

also includes activity related to the bank dealers under the jurisdiction of 

the federal banking regulators. Using programmed parameters, FINRA 

assesses RTRS data for potential violations of MSRB rules, including G-30 

and G-14. For example, FINRA has surveillance programs that identify 

transaction prices that appear to be outliers compared with prices in the 

rest of the market. FINRA analysts follow up on alerts generated by these 

programs with broker-dealers under its jurisdiction in accordance with 

written policies and procedures and, in certain circumstances, will refer 

potential violations by bank dealers to the appropriate federal banking 

regulator for further investigation. FINRA also assesses compliance with 

the MSRB pricing and trade reporting rules through routine and cause 

examinations of municipal broker-dealers. Examiners use an electronic 

examination module that includes specific instructions for collecting 

documentation, selecting samples, and running data reports, and for other 

aspects of their examinations. FINRA’s surveillance and examinations can 

result in a variety of actions against a firm that violates a rule, such as an 

informal warning or a monetary penalty, among other actions.

The federal banking regulators rely primarily on examinations to monitor 

bank dealers’ compliance with MSRB pricing and trade reporting rules. 

Officials from these agencies explained that they did not have formal 

Regulators Use Various 

Methods to Monitor and 

Enforce Compliance with 

MSRB Pricing and Trade 

Reporting Rules
 

Page 35 GAO-12-265 Municipal Securities 

surveillance programs designed to monitor bank dealers’ compliance with 

MSRB rules. Rather, they periodically review MSRB reports on data 

quality and pricing volatility in RegWeb, often as part of their preparation 

for on-site examinations. In addition, although the federal banking 

regulators all stated that such instances are rare, FINRA may refer to 

them potential violations by bank dealers that it identifies through its 

automated surveillance program. During their on-site examinations, bank 

examiners generally take samples of bank dealers’ transactions and 

review them for compliance with Rules G-30 and G-14. Their 

examinations can result in corrective actions, among other responses.

As part of its oversight of FINRA’s regulatory operations, OCIE assesses 

broker-dealers’ compliance with MSRB Rules G-30 and G-14 through 

broker-dealer examinations. OCIE also may review for compliance with 

these rules in other types of examinations, such as cause examinations 

and risk-targeted examinations. Because OCIE uses a risk-based 

approach to determine areas of focus in these examinations, examiners 

might not always check for compliance with Rules G-30 and G-14. When 

they do, however, they follow OCIE’s written examination procedures.

OCIE’s examinations can result in actions such as a deficiency letter to 

the firm or referral to SEC enforcement staff for a more formal review.

See appendix VI for a more detailed description of how FINRA, the 

federal banking regulators, and OCIE examine for compliance with Rules 

G-30 and G-14.

MSRB and the other regulators coordinate in various ways to facilitate 

effective enforcement of Rules G-30 and G-14, as well as other MSRB 

rules. For example, MSRB officials provided agendas demonstrating that 

SEC, MSRB, and FINRA have held three semiannual meetings since 

December 2010, as mandated by the Dodd-Frank Act, to describe their 

work in the municipal securities market and to discuss any issues related 

to regulation, including rule interpretation, examinations, and enforcement 

of MSRB rules. According to documentation provided by MSRB officials, 

MSRB and FINRA also meet regularly and share information in 

accordance with a memorandum of understanding, and MSRB meets with 

SEC several times a year and with the federal banking regulators twice a 

year to discuss various municipal market issues, with a focus on MSRB 
 

Page 36 GAO-12-265 Municipal Securities 

rule interpretations, amendments, and guidance.62 In addition to holding 

formal meetings, SEC, MSRB, and FINRA staff told us that they 

maintained daily or weekly informal communication to discuss rule filings 

or interpretations; surveillance, examination, and enforcement issues; 

technology issues; and other pertinent matters. As described earlier, 

MSRB also shares RTRS data and other information with the regulators 

via the RegWeb system. Finally, MSRB officials stated that they provide a 

variety of training opportunities to examiners and other staff of SEC, 

FINRA, and other regulators to promote consistency in the enforcement 

of MSRB rules.

According to our review of regulators’ surveillance and examination data, 

FINRA, the federal banking regulators, and OCIE have identified few 

violations of Rule G-30 by broker-dealers and bank dealers from 2006 

through 2010. Regulatory officials told us that they considered a variety of 

factors when determining whether a broker-dealer had charged unfair or 

unreasonable prices, markups, or markdowns. We also found that 

violations of Rule G-14 were not systemic and that the industry average 

for late reported trades had decreased substantially since 2005. Finally, 

sample data from the agency that oversees clearance and settlement of 

municipal trades indicate that municipal transaction settlement failures 

are rare.

Regulators cited a small number of violations of Rule G-30 during the 

period from 2006 through 2010. Specifically, FINRA opened 416 reviews 

based on alerts related to potential G-30 violations occurring during the 5-

year review period.

63

 

62The memorandum of understanding between MSRB and FINRA, created in 2006 and 

substantially broadened under a new memorandum of understanding entered into in 

September 2011, specifies multiple ways in which the two SROs have agreed to work 

together to ensure broker-dealer compliance with MSRB rules. For example, the 

memorandum specifies what kinds of information MSRB will share with FINRA; how 

MSRB will support FINRA’s surveillance, examination, and enforcement activities, 

including providing technical support and referring potential rule violations to FINRA; and 

how often MSRB and FINRA will meet regarding specific regulatory activities.

FINRA had completed 343 of those reviews by June 

2011. Of those 343 reviews:

63FINRA officials told us that the number of alerts does not necessarily equate to the 

number of cases they opened. For instance, FINRA might open a single case in response 

to hundreds of alerts for a broker-dealer firm. 

Regulators’ Surveillance 

and Examinations Did Not 

Reveal Systemic Trade 

Pricing, Reporting, or 

Clearance and Settlement 

Issues

Trade Pricing
 

Page 37 GAO-12-265 Municipal Securities 

• FINRA determined that 267 (78 percent) warranted no further review. 

FINRA officials explained that they had investigated the prices and 

markups for the firms in question and found that violations had not 

actually occurred or were too minor to warrant further action.64

• Eleven reviews (3 percent) resulted in a cautionary action (an informal 

warning to the broker-dealer that similar violations in the future could 

result in formal disciplinary actions).

• One review (less than 1 percent) resulted in a cautionary action for a 

violation of another MSRB rule.

• Sixty-four (19 percent) were referred internally for potential 

disciplinary action.

Of the 64 reviews FINRA’s surveillance group referred internally, 22 were 

closed as of June 2011. Of those 22 reviews:

• Two (9 percent) warranted no further review.

• Eight (36 percent) resulted in a cautionary action.

• Twelve (55 percent) resulted in a Letter of Acceptance, Waiver and 

Consent (a disciplinary action in which the broker-dealer consents to 

findings and the imposition of sanctions but neither admits nor denies 

the violations).

Likewise, out of 5,764 examinations with a municipal securities 

component that FINRA conducted from 2006 through 2010, 51 

examinations (less than 1 percent) identified G-30 violations that resulted 

in a formal or informal action. Of those 51 examinations:

• Thirty-seven (about 73 percent) resulted in a cautionary action.

• Eleven (about 22 percent) resulted in a compliance conference (a 

more serious type of informal action that involves a meeting between 

 

64FINRA officials noted that in cases where broker-dealers that were FINRA members 

committed pricing violations that did not warrant further review because of the limited 

nature of the violations or mitigating factors, FINRA typically sought restitution on behalf of 

customers for any losses the customers incurred in violative transactions.
 

Page 38 GAO-12-265 Municipal Securities 

FINRA management and the broker-dealer firm to discuss the 

violations).

• Three (about 6 percent) were referred internally for potential 

disciplinary action.65

We reviewed 25 of the 51 examinations and found that the markups and 

markdowns that FINRA questioned in those examinations ranged from 

about 2 percent to about 10 percent.66 The federal banking regulators did 

not report any G-30 violations in the 87 total bank dealer examinations 

they conducted from 2006 through 2010. OCIE staff also said that, for the 

examinations they conducted during this time frame in which they 

assessed broker-dealers for G-30 compliance, they observed a relatively 

low rate of G-30 violations.67

Regulators consider multiple factors in determining broker-dealers’ 

compliance with Rule G-30. For example, Rule G-30 specifies four factors 

that broker-dealers must consider when determining a fair and 

reasonable price, including the broker-dealer’s best judgment as to the 

fair market value of the securities at the time of the transaction. In 

addition, in its interpretive notices, MSRB has identified other factors that 

may be relevant to this determination, such as the resulting yield—or 

annual rate of return—of the security to a customer. To determine 

whether a broker-dealer is in compliance with Rule G-30 on a specific 

 

65Percentages total more than 100 percent because of rounding.

66Although the markups and markdowns in the examinations we reviewed ranged from 

about 2 percent to about 10 percent, FINRA officials noted that there is no upper limit on 

markup or markdown percentages that examiners would question.

67We obtained information from OCIE on broker-dealer examinations conducted from 

2002 through 2010 and on the MSRB rule violations cited. However, the Super Tracking 

and Reporting System (STARS), the OCIE database that stores this information, does not 

allow users to conduct automatic searches for certain examination components, such as 

products reviewed. Therefore, the list of approximately 1,100 examinations and MSRB 

violations we received likely did not capture all of the examinations OCIE conducted with a 

municipal component from 2002 through 2010. OCIE is aware of the deficiency with the 

database, and staff stated that SEC is currently developing new systems with improved 

search capabilities. In addition, as noted above, OCIE does not consistently review for 

compliance with all MSRB rules in every examination it conducts. For these reasons, we 

chose not to present statistics from the broker-dealer examination information we received 

from OCIE. However, we did review selected OCIE broker-dealer examinations to observe 

how OCIE examiners assessed them for compliance with certain MSRB rules, particularly 

G-30 and G-14.
 

Page 39 GAO-12-265 Municipal Securities 

trade, regulators must consider how well the broker-dealer has applied all 

of the relevant factors as well as the facts and circumstances of the 

transaction. Table 4 lists the written factors that regulators consider in 

enforcing this rule. For instance, as part of their consideration of whether 

broker-dealers use their best judgment in pricing securities, OCIE 

examiners stated that when they found a potentially excessive markup, 

they checked to see whether the market had moved or significant 

information about the issuer had become available just before the 

transaction.

Table 4: Factors That Regulators Consider in Determining Broker-Dealers’ 

Compliance with MSRB Rule G-30 

Source Factors

Rule G-30 Broker-dealer’s best judgment as to the fair market value of the 

securities at the time of the transaction and of any securities 

exchanged or traded in connection with the transaction

Broker-dealer’s expense in effecting the transaction

Broker-dealer’s entitlement to a profit

Total dollar amount of the transaction

MSRB Interpretive 

Notices

Yield comparable to that on other securities of comparable quality, 

maturity, coupon rate, and block size then available in the market

Maturity of the security

Availability of the securities in the market

Nature of the broker-dealer’s business

Sources: GAO summary of Rule G-30 and MSRB guidance.

We observed how examiners assessed broker-dealers’ application of 

some of these factors in our review of selected FINRA examinations with 

G-30 violations. For example, FINRA examiners identified six potential G30 violations—all in the form of excessive markups—at one firm they 

examined. When they asked the firm to explain the markups, which 

ranged from about 4 percent to nearly 10 percent, the firm stated that all 

of the transactions in question involved low-rated or unrated bonds and 

occurred in late 2008, when the market was highly volatile.68

 

68Unrated bonds would likely require the broker-dealer to do more research, which could 

increase the expense of executing the transaction. Similarly, low-rated bonds may be 

more challenging for broker-dealers to market to potential buyers than well-known, highly 

rated securities, possibly resulting in higher markups. 

The firm also 

stated that because it had no customers for the bonds at the time it 
 

Page 40 GAO-12-265 Municipal Securities 

purchased them, it had assumed additional risks, and that no comparable 

interdealer trades were available to establish the prevailing market price. 

While FINRA examiners concluded that four of the six transactions were 

fair and reasonable, they cited G-30 violations on the two remaining 

transactions based on the combination of high markups, firm profits, and 

the transactions’ proximity in time to interdealer purchases. Illustrating the 

importance of reviewing the individual facts and circumstances in each

transaction, examiners deemed one of the highest markups acceptable 

because the security had been trading within a wide range of prices 

around the time of the trade in question and the transaction resulted in a 

high yield to the customer relative to those of comparable securities. In 

another examination, FINRA examiners questioned a trade in which a 

firm bought 10 bonds from a customer at a price substantially lower than 

the last reported trade, which had occurred about a week earlier. The firm 

indicated that the security’s credit rating had dropped within that time 

period. Given this downgrade and the fact that the bonds in question 

continued to trade in the lower range for about a month afterward, FINRA 

examiners determined that the firm had set a fair and reasonable 

aggregate price and thus had not violated Rule G-30.

In April 2010, MSRB proposed draft guidance that would provide greater 

specificity for broker-dealers acting as principals in determining a 

security’s prevailing market price. Specifically, MSRB’s Regulatory Notice 

2010-10 proposed a hierarchical approach that is intended to harmonize 

with FINRA’s approach to pricing nonmunicipal debt securities.69

 

69FINRA’s IM-2440-2 states that in a debt security transaction with a customer, a brokerdealer’s markup or markdown must be calculated from the prevailing market price of that 

security. This price is typically the broker-dealer’s cost or proceeds from a recent interdealer 

purchase or sale in the same CUSIP (contemporaneous cost or proceeds) to which the firm 

was a party. To avoid this pricing policy, the broker-dealer must show that, given particular 

circumstances, the contemporaneous cost or proceeds were not indicative of the prevailing 

market price. In the event that the broker-dealer does not have a recent interdealer 

transaction to identify the current prevailing market price of the bond, FINRA (in IM-2440-2) 

provides a hierarchy of alternatives for determining its prevailing market price. 

The 

proposed approach would first have the broker-dealer use as the 

prevailing market price his contemporaneous costs or proceeds—in other 

words, his costs or proceeds from a transaction recent enough that it 

would be expected to reflect the current market price for the security. If a 

broker-dealer wished to use a source other than his contemporaneous 

costs or proceeds to determine the prevailing market price, he would be 

required to search through a hierarchy of relevant transactions to seek 
 

Page 41 GAO-12-265 Municipal Securities 

other appropriate comparison prices. In addition, broker-dealers would be 

required to document how they determined the prevailing market price in 

cases where they did not use contemporaneous costs or proceeds. 

MSRB officials told us that the proposed method would likely make it 

easier for regulators to conduct surveillance and enforcement for Rule G30, because it would provide a relatively mechanical way to determine a 

security’s prevailing market price. However, broker-dealers have 

expressed concerns about the proposed method, citing, among other 

issues, increased burdens and risks to liquidity. As of January 9, 2012, 

MSRB had not finalized the proposed guidance.70

Although regulators identified G-14 violations during our review period, 

these trade reporting issues did not appear to be systemic. According to 

data we received from MSRB, from February 2005 (the month after the 

15-minute reporting requirement took effect) through July 2011, the 

monthly industry average for late trades declined from approximately 7 

percent to less than 1 percent. The average rate of late trades during this 

time frame was less than 2.5 percent. FINRA officials noted that in 2005 

FINRA had assigned a dedicated team to conduct automated surveillance 

reviews of the municipal market, with an initial focus on late trade 

reporting. FINRA officials believe that these surveillance efforts likely 

played a role in the decline of the industry G-14 violation average. FINRA 

opened 721 reviews based on alerts related to potential G-14 violations

occurring from 2006 through 2010. FINRA’s surveillance group had 

completed 621 of those reviews as of June 2011. Of the 621 reviews:

• FINRA determined that 323 (52 percent) required no further review. 

As with the reviews stemming from G-30 alerts, FINRA officials 

explained that they had investigated the transaction reports for the 

firms in question and found that violations had not actually occurred or 

were too minor to warrant further action.

• Fifty-five (9 percent) resulted in a cautionary action for a G-14 

violation.

 

70The proposed guidance provides several illustrations to explain how broker-dealers 

would determine the prevailing market price in different situations. However, according to 

MSRB officials, one of the illustrations conflicts with, and certain principles underlying the 

proposed guidance may not be entirely consistent with, Draft Rule G-43, a proposed rule 

addressing the use of broker’s brokers that MSRB has twice issued for comment since 

February 2011. MSRB officials stated that they were waiting to finalize the guidance on 

pricing until they had considered all comments on Draft Rule G-43.

Trade Reporting
 

Page 42 GAO-12-265 Municipal Securities 

• Ten (about 2 percent) resulted in a cautionary action for violations of 

other MSRB rules.

• Another 233 (about 38 percent) were referred internally for potential 

disciplinary action.

Of the 233 reviews FINRA’s surveillance group referred, 147 had been 

completed as of June 2011:

• Eight (5 percent) warranted no further review.

• Fourteen (about 10 percent) resulted in a cautionary action.

• Three (2 percent) resulted in a minor rule violation plan letter (an 

informal disciplinary process that allows FINRA to assess fines of less 

than $2,500).

• The remaining 122 (83 percent) resulted in a Letter of Acceptance, 

Waiver and Consent.

Also from 2006 through 2010, out of the 5,764 examinations they 

conducted with a municipal securities component, FINRA examiners cited 

G-14 violations resulting in a formal or informal action in 910 (about 16 

percent). Of those 910 examinations:

• Some 699 (about 77 percent) resulted in a cautionary action.

• Another 136 (15 percent) resulted in a compliance conference.

• Forty-two (about 5 percent) resulted in a Letter of Acceptance, Waiver 

and Consent.

• The remaining 33 examinations (about 4 percent) resulted in minor 

rule violation plans, internal referrals for potential disciplinary action, 

or offers of settlement.

In the sample of 32 FINRA examinations we reviewed with G-14 

violations, we found that the violations stemmed from a variety of 

sources, including human error, deficient procedures, a firm’s failure to 

submit or update a Form RTRS, or technical malfunctions, among other 

reasons. However, human error and deficient procedures were the most 

commonly cited causes. Regulators noted that late or inaccurate trade 

reporting was relatively simple to identify through surveillance and 
 

Page 43 GAO-12-265 Municipal Securities 

examinations and that broker-dealers could be cited for a G-14 violation 

based on as little as one or two late or inaccurately reported trades. For

example, in one of the FINRA examinations we reviewed, examiners took 

a sample of 60 trades and found that 2 were reported to MSRB with the 

incorrect price. A representative of the broker-dealer firm told examiners 

that the firm had corrected the trades the day they were entered but that 

an error had led to the suppression of the amended information. FINRA 

counts instances like this as G-14 violations and requires broker-dealers 

to update MSRB with the correct information if possible.

The federal banking regulators cited G-14 violations in 8 of the 87 bank 

dealer examinations they conducted. They generally responded to these 

violations with corrective action requirements. On the basis of 

examinations they conducted during this time frame in which they 

assessed broker-dealers for G-14 compliance, OCIE staff agreed that G14 violations appeared to have decreased in recent years and said that 

the inadvertent late trades they continued to see were sometimes 

attributable to factors such as breakdowns in trade reporting systems.

OCIE staff told us that settlement failures typically appeared to represent 

a low percentage of municipal transactions cleared through NSCC. 

According to data gathered during a 5-day trading period in June 2011 by 

NSCC, municipal trade settlement failures composed approximately 2.1 

percent of the total dollar value of all NSCC settlement failures across all 

markets for that time period.71

 

71Officials from the Depository Trust and Clearing Corporation (DTCC), the parent

company of DTC and NSCC, stated that NSCC typically did not track settlement failures 

by type of security (for example, municipal, equity, and so on). However, NSCC analyzed 

municipal settlement failures in response to our request. DTCC officials also noted that 

DTC and NSCC did not clear and settle 100 percent of all trades, municipal or otherwise. 

However, they stated that DTC and NSCC likely handled the majority of municipal trades.

Clearance and Settlement
 

Page 44 GAO-12-265 Municipal Securities 

Since 2005, OCIE has not inspected FINRA’s fixed-income surveillance 

program or MSRB, both because of staffing limitations and because of 

changes to its inspection approach. OCIE’s written inspection guidelines 

call for inspections of MSRB and FINRA’s regulatory programs.72 OCIE 

did not have a fixed schedule for examining MSRB, but its SRO 

Inspection Guidelines stated that the office generally inspected each SRO 

under its jurisdiction every 1-4 years. Until 2010, OCIE conducted routine 

inspections of various aspects of FINRA’s operations—including district 

office programs, arbitration, customer communication, central review, and 

financial operations—every 2 to 4 years in accordance with its SRO 

inspection guidelines. Surveillance, examination, and enforcement 

programs were typically components of these routine inspections, but 

municipal securities were not included in each inspection cycle. From 

2000 through 2010, mostly in accordance with a 3-year cycle, OCIE 

conducted 49 inspections of FINRA’s district offices, which conduct the 

majority of broker-dealer examinations. As part of these inspections, they 

assessed whether FINRA examined municipal securities broker-dealers 

at least once every 2 years and reviewed a sample of FINRA’s 

workpapers to determine whether FINRA examiners thoroughly reviewed 

broker-dealers for compliance with all MSRB rules and other applicable 

rules and regulations. However, the district office inspections are not 

intended to address FINRA’s surveillance activities or policies and 

procedures for its municipal market regulatory programs. In 2010, OCIE 

began transitioning to a risk-based SRO inspection approach in 

conjunction with a comprehensive assessment of OCIE’s structure and 

functions.73

OCIE has not inspected FINRA’s fixed-income surveillance programs or

MSRB since 2005. OCIE’s inspections of FINRA and MSRB in 2005 

As such, OCIE will no longer conduct inspections according 

to a routine schedule but rather based on issues that represent the 

greatest risks to investor protection and market integrity.

 

72OCIE’s Market Oversight group examines SROs that are registered securities 

exchanges, FINRA (a national securities association), MSRB, the Public Company 

Accounting Oversight Board, and the Securities Investor Protection Corporation. OCIE’s 

Clearing and Settlement group examines clearing agency SROs. In 2009, this group 

conducted inspections of DTC and NSCC, SROs that conduct clearance and settlement of 

municipal securities trades. 

73OCIE transitioned several years ago to a risk-based approach to examining brokerdealers and investment advisors. OCIE staff stated that this approach permits the 

examination program to focus its resources on entities and issues that pose the highest 

risk for investors.

OCIE Has Not Inspected 

Key SROs’ Municipal 

Activities since 2005 and 

Has Conducted Limited 

Monitoring of SRO 

Regulatory Efforts
 

Page 45 GAO-12-265 Municipal Securities 

produced findings related to their municipal securities oversight 

activities.74

OCIE staff said that staffing constraints had prevented them from starting 

another inspection sooner to review FINRA’s fixed-income surveillance 

program and MSRB. According to OCIE data, staffing of OCIE’s Market 

Oversight group, which is responsible for inspections of FINRA and 

MSRB and other SROs that are not clearing agencies, has declined by 5 

employees (about 12 percent) since fiscal year 2007—when we last 

reported on staffing of this group—and by 24 employees (nearly 40 

percent) since fiscal year 2005.

While the two SROs responded to OCIE’s findings and 

recommendations with corrective actions or, in a few cases, rebuttals, 

OCIE has not yet confirmed through on-site inspections whether they 

have adequately addressed these recommendations. OCIE staff only 

recently began a new inspection of FINRA that will encompass its fixedincome surveillance program, including the municipal trade reporting and 

markup reviews. OCIE has not yet begun another inspection of MSRB.

75 As shown in table 5, as of September 

2011, the Market Oversight group consisted of 38 active staff, including 

12 managers, 25 professional staff (examiners), and 1 support staff.

According to OCIE staff, the majority of staff members in the Market 

Oversight group have a law degree, and 11 people have prior experience 

in fixed-income issues. Furthermore, OCIE staff stated that positions in 

the Market Oversight group are a mixture of entry-level and senior 

positions, with staff typically staying approximately 4 to 5 years before 

going elsewhere within or outside of SEC. As of September 2011, 

according to OCIE staff, the Market Oversight group had seven vacant 

slots, but an SEC hiring freeze limited OCIE’s ability to fill most of these 

positions.

 

74OCIE’s inspection findings are not public information.

75GAO-08-33. 
 

Page 46 GAO-12-265 Municipal Securities 

Table 5: Number of OCIE Market Oversight Staff, Fiscal Years 2005-2011 

Managers Staff 

Fiscal year

Senior 

officer 

Assistant 

director

Branch 

chief Professional Support a Year 

total 

2005 2 4 9 43 4 62 

2006 2 3 9 29 4 47

2007 2 4 8 26 3 43 

2008 2 4 8 35 2 51 

2009 2 3 8 34 2 49 

2010 1 4 8 33 1 47 

2011 (as of 

9/16/2011) 

1 4 7 25 1 38

Source: GAO summary of OCIE data.

a

According to the information OCIE provided, there were 27 professional staff in the group as of 

September 16, 2011. However, that number includes two people who were detailed to other offices in 

the agency and were not actively working in the Market Oversight group. Therefore, we list the 

number of available professional staff as 25 rather than 27. 

Although OCIE is transitioning to a risk-based approach to SRO 

inspections, it lacks sufficient data on the SROs’ fixed-income regulatory 

activities that it could use to inform this approach. OCIE’s mission 

includes protecting investors and ensuring market integrity through riskbased strategies that, among other things, are designed to improve 

compliance and monitor risk. However, OCIE currently engages in limited 

monitoring of the SROs between inspections and may not have sufficient 

sources of information to allow it to effectively assess the risk level of 

SROs’ regulatory programs. OCIE staff told us that they plan to convene 

all of the SROs in early 2012 to, among other things, clarify expectations 

relating to their activities. One of the objectives of the SRO outreach will 

be to share issues that OCIE identified in assessments it conducted of all 

equity and options SROs in 2011 that have implications across the SROs. 

However, this effort will not provide staff with information on the quality of 

ongoing SRO oversight in any particular area—such as fixed-income 

surveillance—between inspections. OCIE staff also participate in the 

meetings mandated by the Dodd-Frank Act that include SEC, MSRB, and 

FINRA. While such communication is essential to helping ensure uniform 

interpretation of MSRB rules and discussing recent trends in 

enforcement, among other things, it does not provide insight into the 

ongoing effectiveness of SRO regulatory programs. We found that OCIE 

received and reviewed quarterly reports from FINRA on its regulatory 

activities related to municipal securities markups and markdowns. 

However, an OCIE staff member told us that the reports, which present 
 

Page 47 GAO-12-265 Municipal Securities 

aggregate statistics, reveal little about the effectiveness of FINRA’s 

activities in this area.

For a risk-based inspection approach to be effective, it is essential for 

OCIE to maintain ongoing monitoring and communication with the SROs 

to keep abreast of the current operations and to use this information to 

update its supervisory strategies. We note that the review period OCIE 

covered in its 2005 FINRA inspection predated the recent financial crisis 

and ensuing volatility in the municipal securities market. Although OCIE is 

now conducting an inspection of FINRA that encompasses its fixedincome surveillance program, it had not obtained any information since its 

last inspection about the quality of FINRA’s market oversight. Further, 

MSRB implemented RTRS in 2005 and began making real-time trade 

price information freely and publicly available on the EMMA website in 

2008, but OCIE has not performed any independent reviews or otherwise 

obtained information to establish the quality or reliability of the data in this 

system, despite the fact that market participants use it for pricing 

purposes and that SEC, FINRA, and the federal banking regulators rely 

heavily on the data to carry out their regulatory activities.76

SEC proposed a rule (17a-26) in 2004 that would require certain SROs 

(specifically, national securities exchanges or registered securities 

associations, such as FINRA) to periodically review the operation and 

performance of their regulatory programs. This rule was intended to allow 

OCIE to monitor the SROs covered by the rule during the periods 

between inspections and identify both SRO-specific issues as well as 

common issues across multiple SROs. The rule would, among other 

things, require SROs it covered to submit quarterly reports to SEC on the 

results of their regulatory activities, including surveillance, complaints 

received, and investigations, examinations, and enforcement actions.77

 

76As noted earlier, we conducted a data reliability assessment of the MSRB trade data 

with respect to specific variables for our purpose, which was to understand how prices 

differ for institutional and individual investors. However, we did not assess the MSRB 

data’s reliability for the transparency or regulatory purposes for which broker-dealers, 

investors, and regulators use the system. 

While the proposed rule in its current form may have some limitations—

for example, the quarterly reports might not provide OCIE with much 

77SEC Release No. 34-50699, November 18, 2004. The rule was part of a larger package 

of proposed rules and amendments related to fair administration and governance of 

SROs, which SEC has not finalized.
 

Page 48 GAO-12-265 Municipal Securities 

insight into the effectiveness of the SROs’ regulatory activities—it would 

provide a mechanism for OCIE to regularly collect and analyze 

information from the SROs. Without collecting information on an ongoing 

basis that provides insight into the effectiveness of SRO regulatory 

programs, OCIE may not be able to identify anomalies or changes in the 

operations that warrant more immediate inspections. 

OCIE is transitioning to a risk-based approach for its SRO inspection 

program and is convening a meeting with the SROs in 2012 to share 

issues staff have already identified that have implications across the SROs. 

Among other things, the risk-based approach is intended to improve 

compliance and monitor risk. While OCIE’s efforts to implement a riskbased inspection program have the potential to better target scarce 

resources to high-risk areas, its limited monitoring of the SROs between 

inspections could result in its missing potential new or ongoing issues with 

their regulatory programs. For example, OCIE’s last inspection of FINRA’s 

fixed-income surveillance program predated the recent financial crisis and 

ensuing volatility in the municipal securities markets. Although OCIE 

obtained some information on FINRA’s examination program through its 

district office inspections and broker-dealer examinations, its lack of a 

structured mechanism for monitoring the quality of FINRA’s fixed-income 

surveillance during that time means that OCIE will not have a full picture of 

how effective FINRA was in surveilling for and detecting violations of MSRB 

rules until it finishes its 2011 inspection—more than 3 years after the 

financial crisis began and more than 6 years since its last inspection.

Proposed Rule 17a-26 is an example of a mechanism that OCIE could 

use to obtain meaningful information for ongoing monitoring of SRO 

regulatory programs for the municipal securities market. This proposed 

rule would compel the SROs to review, on an annual and a quarterly 

basis, the operation and performance of their regulatory programs and 

report the results of these reviews to SEC. Finalizing this rule—revised as 

necessary to reflect OCIE’s current informational needs—would allow 

OCIE examiners to formally collect and analyze interim data on the 

operation and effectiveness of SROs’ programs and potentially facilitate 

ongoing oversight of SROs between inspections. Such information could 

provide regulators with more up-to-date information on the state of the 

market and SROs’ regulatory efforts. In addition, it could help OCIE meet 

its goal of identifying high-risk areas and leverage its staff resources 

appropriately. Unless OCIE takes steps to gather and analyze information 

on the SROs’ fixed-income regulatory programs on an ongoing basis, it 

Conclusions
 

Page 49 GAO-12-265 Municipal Securities 

may not learn about emerging or recurring issues or risks in a timely 

manner and take steps to address them.

To improve SEC’s ability to monitor the operations and effectiveness of 

SRO regulatory programs related to municipal securities trading between 

inspections and to help identify areas of high risk, we recommend that the 

Chairman of the Securities and Exchange Commission direct OCIE to 

take steps to gather and analyze information on the SROs’ fixed-income 

regulatory programs on an ongoing basis and use it to inform their riskbased inspection approach.

We provided a draft of this report for comment to the SEC Chairman for 

her review and comment. SEC provided written comments that are 

reprinted in appendix VII. SEC also provided technical comments that 

were incorporated as appropriate. In addition, we provided a draft of this 

report to the Federal Reserve, FDIC, and OCC, for their review and 

comment. These agencies did not provide written comments, but we 

incorporated their technical comments where appropriate. We also 

provided a copy of the draft report to MSRB and FINRA for their review 

and incorporated technical comments from them as appropriate.

In its written comments, SEC agreed with our findings. With respect to our 

recommendation that SEC improve its ability to monitor the operations 

and effectiveness of SRO regulatory programs between inspections by

gathering and analyzing information from the SROs on an ongoing basis,

SEC agreed that more enhanced oversight of the SROs’ fixed-income 

regulatory programs is needed and that it has already begun that process 

through the transition to a risk-focused approach. SEC noted, however, 

that more frequent review and analysis would require additional staff 

resources and reiterated that OCIE has been unable to fill several vacant 

positions in its Market Oversight group due to limitations on SEC hiring 

under a Continuing Resolution. SEC further noted that even if the vacant 

positions were filled, OCIE’s Market Oversight group would continue to be 

understaffed relative to the number and complexity of entities that it 

examines and that it would need additional resources to conduct more 

frequent inspections of FINRA and MSRB’s fixed-income programs or to 

do interim monitoring of FINRA’s fixed income surveillance program. As 

we observed, SEC’s efforts to implement a risk-based inspection program 

have the potential to better target its scarce resources to high-risk areas. 

Gathering and analyzing data from the SROs on an ongoing basis could 

Recommendation for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 50 GAO-12-265 Municipal Securities 

help SEC better meet its goal of identifying high-risk areas and leveraging

its staff resources for inspections. 

We are sending this report to the Senate Committee on Banking, 

Housing, and Urban Affairs and the House Committee on Financial 

Services. We are also sending copies of the report to the Special 

Committee on Aging, U.S. Senate; the Committee on Agriculture, 

Nutrition, and Forestry, U.S. Senate; the Committee on Agriculture, U.S. 

House of Representatives; and the Chairman of the SEC. The report also 

is available at no charge on the GAO website at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

me at (202) 512-8678 or clowersa@gao.gov. Contact points for our 

Offices of Public Affairs and Congressional Relations may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix VIII. 

A. Nicole Clowers

Director

Financial Markets and Community Investment
Appendix I: Potential Uses, Risks, and 

Oversight of Derivative Products in the 

Municipal Securities Market 

Page 51 GAO-12-265 Municipal Securities 

Prior to the financial crisis that began in the summer of 2007, municipal 

governments made increasing use of interest rate swaps, a derivative 

product.

1 In an interest rate swap, a municipal issuer enters into a contract 

with a counterparty (typically an investment bank, commercial bank, or 

insurance company), and agrees to exchange periodic interest payments. 

Municipal issuers may use interest rate swaps to try to lower their 

borrowing costs. For example, by issuing variable-rate securities and 

entering into a variable-to-fixed interest rate swap, an issuer may be able to 

obtain a lower fixed-rate interest payment than it otherwise could obtain if it 

had issued fixed-rate securities directly. In this case, after issuing the 

variable-rate securities, the issuer enters into a swap agreement with a 

counterparty that agrees to pay the issuer a variable rate based on an 

index that is intended to approximate the variable-rate interest payments 

that the issuer must make to its investors. In exchange, the issuer agrees 

to pay the counterparty a fixed interest rate. As a result, the issuer achieves 

a synthetic fixed rate by converting a variable-rate obligation to a fixed-rate 

obligation.2 Payment exchanges between the issuer and the counterparty 

reflect differences between the fixed rate and the variable rate during a 

specific period of time. The swap does not alter the issuer’s obligations, 

including debt servicing, to existing investors.3

Municipal issuers incur a number of risks when they enter into interest 

rate swaps, including basis risk, termination risk, and counterparty risk 

Basis risk is the risk that the variable rate paid by the issuer to its 

investors is more than the variable interest rate received under the swap. 

If that occurs, the payments the issuer receives from the counterparty are 

less than the payments the issuer must make to the investors. The issuer 

must cover that difference in addition to paying the fixed rate on the swap 

to the counterparty. Termination risk is the risk that the swap may 

terminate or be terminated before its expiration. Swap agreements allow 

 

1

A derivative is a financial instrument created from or whose value depends upon the 

value of one or more separate assets or indexes of asset values. 

2

In an interest rate swap, the principal amount is not actually exchanged between the 

counterparties. The payments on an interest rate swap are a function of the (1) principal 

amount, (2) interest rates, and (3) the time elapsed between payments. The 

counterparties to the swap agree to exchange payments on specific dates, according to a 

predetermined formula.

3

Beyond seeking cost savings, issuers may also use interest rate swaps to hedge interest 

rate risk in their debt portfolios, better manage their assets and liabilities, or gain access to 

different markets and their respective investor bases.

Appendix I: Potential Uses, Risks, and 

Oversight of Derivative Products in the 

Municipal Securities Market
Appendix I: Potential Uses, Risks, and 

Oversight of Derivative Products in the 

Municipal Securities Market 

Page 52 GAO-12-265 Municipal Securities 

for termination of the swap by either party in the case of certain events, 

such as payment defaults on the swap or credit rating downgrades. For 

example, if the issuer triggers an early termination, it could owe a 

termination payment reflecting the value of the swap under the market 

conditions at that time. If market rates have changed to the issuer’s 

disadvantage (e.g., the issuer is a fixed-rate payer and interest rates have 

declined), the issuer will be “out of the money” on the swap, that is, the 

fixed rate that the issuer is paying to the counterparty is higher than the 

current market rate, and owe the counterparty a termination payment. A 

termination of a swap can result in a substantial unexpected payment 

obligation. Counterparty risk is the risk that the counterparty will default 

on its payment obligations to the issuer.

The recent financial crisis heightened the exposure of a number of 

municipal issuers with interest rate swaps to these risks. For example, a 

number of municipal issuers had insured their underlying variable-rate 

securities with bond insurance. However, the downgrades in these 

insurers’ credit ratings during the financial crisis resulted in some issuers 

having to post collateral on the swap agreements they had entered into or 

face termination of the swaps.4

In some cases where municipal issuers have suffered losses because of 

swap agreements, issuers allege that the counterparties that sold them 

the swaps (swap dealers) misrepresented the risks of the swaps that they 

sold to the issuers. In other cases, they have called into question the fees 

that the swap dealers made. Questions grew that some of the municipal 

issuers that entered into swaps during this period did not understand 

these complicated products or their risks.

Because interest rates had declined 

significantly at that time, these issuers were out of the money—making it 

expensive to terminate the contract. However, a number of issuers 

refunded their variable rate securities and terminated the swaps to free 

themselves from these agreements.

 

4

Bond insurance guarantees investors timely interest payments and, if the issuers default, 

the return of principal. According to Thomson Reuters data in the 2006 and 2011 Bond 

Buyer Yearbook, in 2005, nine highly rated bond insurers insured about 57.1 percent of 

new issue volume (or 51 percent of newly issued securities). By 2010, there was only one 

active bond insurer in the market, providing insurance to approximately 6.2 percent of new 

issue volume (or 12 percent of newly issued securities). During the recent financial crisis, 

many of these insurers had suffered financial losses brought on by their exposure to 

troubled mortgage-backed securities and were subsequently downgraded. 
Appendix I: Potential Uses, Risks, and 

Oversight of Derivative Products in the 

Municipal Securities Market 

Page 53 GAO-12-265 Municipal Securities 

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act) created a comprehensive framework to provide 

oversight over the previously unregulated over-the counter derivatives 

market. The Dodd-Frank Act provided the Commodities Futures Trading 

Commission (CFTC) the authority to regulate swaps, including interest 

rate swaps.5 Section 731 specifically amended the Commodity Exchange 

Act (CEA) to provide CFTC with both mandatory and discretionary 

rulemaking authority to impose business conduct requirements on swap 

dealers and major swap participants in their dealings with counterparties 

generally, including municipal issuers, which are among the entities 

termed “special entities.”6 In January 2012, CFTC issued rules to 

implement this authority.7

Among other things, the rules establish a “know your counterparty” 

requirement. This requirement requires a swap dealer (but not a major 

swap participant) that acts as an adviser to a special entity to make a 

reasonable determination that any swap it recommends is in the special 

entity’s best interest and make reasonable efforts to obtain information 

necessary to make a reasonable determination that the swap it 

recommends is in the special entity’s best interest.

 

8

 

5

The Dodd-Frank Act provided the Securities and Exchange Commission (SEC) the 

authority to regulate security-based swaps, security-based swap dealers, and major 

security-based swap participants. SEC has proposed rules to implement this authority. 

The swap dealer will 

comply with its duty to act in the special entity’s best interest where it 

complies with the “reasonable efforts” requirement, acts in good faith and 

makes full and fair disclosure of all material facts and conflicts of interest 

6

The Dodd-Frank Act defines a swap dealer as any person that holds itself out as a dealer 

in swaps, makes a market in swaps, regularly enters into swaps with counterparties in the 

ordinary course of business for its own account, or engages in any activity causing the 

person to be commonly known as a dealer or market maker in swaps in connection with 

CFTC-regulated swaps. It defines a major swap participant as any person that is not a 

swap dealer and that meets any of the following criteria: maintains a substantial position in 

swaps, holds outstanding swaps that create substantial counterparty exposure, or is a 

highly leveraged financial entity. It defines special entities to include states and their 

political subdivisions (state agencies, cities, and counties and other municipalities).

7

This description of the final rules is based on a question and answers document and a 

press release outlining the rule issued by the CFTC on January 12, 2012. A copy of the 

final rule itself was not available.

8

A swap dealer acts as an adviser to a special entity when it recommends a swap or 

trading strategy involving a sway that is tailored to the particular needs of the special 

entity.

Pursuant to the DoddFrank Act, CFTC Has 

Issued Rules Regulating 

Swap Dealers’ 

Transactions with 

Municipal Issuers
Appendix I: Potential Uses, Risks, and 

Oversight of Derivative Products in the 

Municipal Securities Market 

Page 54 GAO-12-265 Municipal Securities 

with respect to the recommended swap, and employs reasonable care 

that the swap is designed to further the special entity’s objectives. The

rules also require swap dealers and major swap participants to disclose to 

their counterparties material information about swaps, including material 

risks, characteristics, incentives, and conflicts of interest. Additionally, 

CFTC’s rules establish several duties for swap dealer and major swap 

participants, including the duty to verify a counterparty’s eligibility to 

transact in the swap markets, provide the daily midmarket value of 

uncleared swaps to the counterparty, and ensure all communications to 

the counterparty are fair and balanced. A swap dealer who recommends 

a swap must conduct reasonable diligence to understand risks and 

rewards of the recommendation and have a reasonable basis to believe 

that the recommendation is suitable for the counterparty.

The rules also establish a duty for any swap dealer that acts as an 

adviser to a special entity to act in its best interests, which includes 

recommending a swap or trading strategy involving a swap.9

• is sufficiently knowledgeable to evaluate the transaction and risks;

The rules

establish a duty for swap dealers and major swap participants to have a 

reasonable basis to believe that any special entity counterparty has a 

representative that meets the following criteria:

• is not subject to statutory disqualification;

• is independent of the swap dealer or major swap participant;

• undertakes a duty to act in the best interests of the special entity;

• makes appropriate and timely disclosures to the special entity;

• evaluates, consistent with any guidelines provided by the special 

entity, fair pricing and appropriateness of the swap;

 

9

Section 975 of the Dodd-Frank Act defines “municipal adviser” to include, among others 

and subject to certain exclusions, any person that provides advice to or on behalf of a 

municipal entity with respect to municipal financial products, including municipal 

derivatives. The Municipal Securities Rulemaking Board has begun the rulemaking 

process with respect to the fiduciary and other obligations of municipal advisers to their 

municipal entity clients. 
Appendix I: Potential Uses, Risks, and 

Oversight of Derivative Products in the 

Municipal Securities Market 

Page 55 GAO-12-265 Municipal Securities 

• in the case of a special entity that is an employee benefit plan subject 

to the Employee Retirement Income Security Act of 1974 (ERISA), is 

a fiduciary as defined in Section 3 of ERISA; and

• in the case of a special entity that is a municipal entity, is subject to 

restrictions on certain political contributions to certain public officials of 

the municipal entity.

For special entities other than employee benefit plans subject to ERISA, 

the final rule provides a safe harbor under which the swap dealer will be 

deemed to have a reasonable basis to believe that the special entity has 

a qualified representative if the certain conditions are met, including the 

representative stating in writing that it has policies and procedures 

designed to ensure that it satisfies the applicable criteria. 
Appendix II: Scope and Methodology

Page 56 GAO-12-265 Municipal Securities 

To analyze how institutional and individual investors trade municipal 

securities in the secondary market and the factors affecting the prices 

institutional and individual investors receive, we obtained data on all 

municipal securities trades that broker-dealers reported to the Municipal 

Securities Rulemaking Board’s (MSRB) Real-Time Transaction Reporting 

System (RTRS) from January 1, 2005, to December 31, 2010.1 For each 

trade, the data included variables describing characteristics of the 

security, including the dated date (the date from which interest starts to 

accrue), maturity date, interest rate, principal amount at issuance, and 

reoffering price (the price at which underwriters sell newly issued 

securities to the public in the primary market), as well as variables 

describing the characteristics of the trade (trade date/time, settlement 

date, trade price, yield, and trade amount) and trade type (dealer sales to 

customer, interdealer trade, or dealer purchases from customer). We 

analyzed trade data involving newly issued fixed-rate securities to 

understand how trade prices differ for institutional and individual 

investors, using trade size (amount) as a proxy for whether the trade 

involved institutional or individual investors.2 We focused on trades that 

occurred within the period from 30 days prior to and 120 days after the 

dated date on municipal securities.3

 

1

MSRB currently collects information on all municipal securities transactions within 15 

minutes of the trade through RTRS, which began operating on January 31, 2005. Data 

from January 1, 2005, through January 30, 2005, were collected by MSRB on all 

municipal securities transactions the day after the trade occurred via the Trade Reporting 

System. 

We chose to examine this time frame 

because we observed that bonds in our sample trade most frequently 

around the time of issuance and that trading activity declines as the 

number of days after issuance increases, with trading activity typically 

2

MSRB data does not identify the kind of investor involved in a trade; we therefore use 

trade size as a proxy to indicate the kind of investor.

3

We measured days since issuance as the trade date minus the dated date. The dated 

date is the date of an issue from which interest on the issue usually starts to accrue, even 

though the issue may actually be delivered at some later date. We use the dated date as 

our proxy for the date a bond is issued, because the delivery date—the date that is 

considered the issuance date in a municipal securities primary offering—was not included 

in our dataset. We found that other researchers have used the dated date as a proxy for 

the date a bond is issued. We also found that trades that take place prior to the dated date 

tend to settle on or after the dated date—about 70 percent or more settle on the dated 

date and more than 99 percent settle on or after the dated date. This finding is consistent 

with the practice of trades that occur prior to the date a bond is issued, settling on the date 

a bond is issued. Thus, we believe using the dated date as a proxy for the date a bond is 

issued is reasonable.

Appendix II: Scope and Methodology
Appendix II: Scope and Methodology

Page 57 GAO-12-265 Municipal Securities 

leveling off by about 120 days after issuance. Focusing on a period with 

more trading activity improved the precision with which we measured the 

relationships described below. We chose to examine only trades of newly 

issued bonds to ensure that all the trades we analyzed involved bonds 

that had been available to investors for a similar amount of time and to 

limit the likelihood that unobserved, time-varying characteristics of bonds 

influence our analysis.

First, we analyzed the relationship between the relative trade price (the 

trade price as a percentage of the reoffering price) and trade amount by 

trade type in order to determine if prices for smaller trades—those more 

likely to involve individual investors—are different from prices for larger 

trades—those that are more likely to involve institutional investors. 

Second, we analyzed the relationships between spreads (the difference 

between the price on dealer sales to investors and the price on dealer 

purchases from investors as a percentage of the price on dealer 

purchases) within $10,000 trade amount increments and trade amount to 

determine if spreads on smaller trades are different from spreads on 

larger trades. For these regressions, we constructed datasets with one 

observation for each security for each $10,000 trade amount increment. 

For each security, for each $10,000 trade amount increment, we 

calculated the inside spread, mean spread, and outside spread. The 

inside spread is the difference between the lowest trade price on a dealer 

sale and the highest trade price on a dealer purchase as a percentage of 

the highest trade price on a dealer purchase. The mean spread is the 

difference between the mean trade price on a dealer sale and the mean 

trade price on a dealer purchase as a percentage of the mean trade price 

on a dealer purchase. The outside spread is the difference between the 

highest trade price on a dealer sale and the lowest trade price on a dealer 

purchase as a percentage of the lowest trade price on a dealer purchase. 

We only used observations on security-trade amount increment 

combinations for which there existed at least one dealer sale and at least 

one dealer purchase. Third, we analyzed the relationship between price 

dispersion (the difference between the maximum and minimum trade 

price as a percentage of average trade price) and trade amount by trade 

type to determine if prices on smaller trades are more or less dispersed 

than prices on larger trades. For these regressions, we constructed 

datasets with one observation for each security, for each trade type, and 

for each trade amount in $10,000 increments. We formed groups of 

trades for each security, trade type, and trade amount in $10,000 

increments. We then calculated price dispersion for that group of trades 

as the difference between the maximum trade price and minimum trade 

price as a percentage of the average trade price. For all three analyses, 
Appendix II: Scope and Methodology

Page 58 GAO-12-265 Municipal Securities 

our regressions included indicator variables for each security in the 

sample to control for unobserved, time-invariant features of the securities.

We estimated separate regressions for bonds issued in each year from 

2005 through 2010. We present the results of our regression analyses in 

appendix III.

For illustrative purposes, we also calculated descriptive statistics using the 

trade data. First, we calculated the average relative trade price on newly 

issued fixed-rate securities by trade amount and trade type for 2010. 

Second, we determined the average spreads for a $20,000 trade (an 

individual investor-sized trade) and a $5 million trade (a institutional 

investor-sized trade) of a fixed-rate security in 2010. We then used these 

average spreads to calculate the yield to maturity of two hypothetical trades 

of $20,000 and $5 million of the same security. We did this to compare the 

effect of the size of the spread on the return received by an individual 

investor and an institutional investor. Third, we calculated the average price 

dispersion for newly issued fixed-rate securities by trade amount and trade 

type for 2010. We presented these descriptive statistics in tables in the 

report. In conducting our analyses, we carried out a data reliability 

assessment of the MSRB trade data. To do so, we reviewed information on 

the processes and procedures MSRB uses to help ensure that trade data 

entered into RTRS are accurate and complete. We also reviewed the data 

for missing values and outliers and, where we observed instances of such, 

solicited explanations from MSRB staff. On the basis of this information, we 

determined that these data were reliable for our purposes.

We also obtained statistics on the relative size of the municipal securities 

market. We obtained data from the Federal Reserve’s Flow of Funds 

Accounts of the United States on the estimated dollar value of municipal 

securities outstanding and from Bloomberg L.P. (Bloomberg) on the 

number of municipal issuers and outstanding municipal securities that it 

tracks. We also collected data on the total number of public companies 

listed on the major U.S. exchanges from the annual reports of NYSE 

Euronext and NASDAQ OMX. We did not conduct an assessment of the 

reliability of these data sources. However, these data are widely used by 

regulators, market professionals, and academics and are considered 

credible for the purposes for which we used them. In addition, we used 

these data solely for descriptive purposes and not for the purpose of 

making recommendations or drawing conclusions about causality.

We reviewed studies that analyzed pricing in the municipal securities 

market. We limited our survey to those studies using data from 1995 or 

later. We did this because prior to 1995, there was no systematic and 
Appendix II: Scope and Methodology

Page 59 GAO-12-265 Municipal Securities 

comprehensive dissemination of post-trade information for municipal 

securities. We identified five relevant studies by searching the EconLit, the 

JSTOR, the National Bureau of Economic Research (NBER) Working 

Paper Series, and the Social Science Research Network (SSRN) 

databases.4

To determine how federal regulators enforce MSRB rules to ensure fair 

and reasonable prices for investors and the timely and accurate reporting 

of municipal trades, we reviewed relevant MSRB rules, guidance, and 

proposed rules. We focused on Rules G-30, G-14, G-12, and G-15, which 

address pricing, trade reporting, and trade clearance and settlement. We 

also reviewed documentation describing RegWeb, the web portal MSRB 

makes available to federal regulators to analyze and query RTRS data for 

regulatory purposes; the Financial Industry Regulatory Authority’s 

We identified two additional studies through our interviews with 

market participants. Although we did not identify methodological concerns 

with these studies, the inclusion of these studies is for research purposes 

and does not imply that we deem them to be definitive. In addition, we 

attended or viewed the Securities and Exchange Commission’s (SEC) field 

hearings on the state of the municipal securities market, reviewed industry 

literature, and interviewed members of trade organizations representing 

institutional investors, broker-dealers (including broker’s brokers), and 

individual investors; academics; SEC Office of Municipal Securities Market 

officials; MSRB officials and independent municipal market research and 

advisory firms. We also reviewed information from these entities on the 

availability of pre- and post-trade pricing information in the marketplace, 

and we spoke to market participants interested in forming an exchange for 

municipal securities. To understand how electronic systems and trading 

platforms are used in the trading of municipal securities, we received a 

demonstration from Bloomberg on the services it offers to municipal brokerdealers and other subscribers to facilitate municipal securities trading and 

analysis. We also reviewed existing alternative trading systems (ATS) 

operating in this market by analyzing their annual Form ATSs submitted to 

SEC and other descriptive information and received a demonstration from 

one ATS of its electronic platform for trading municipal securities.

 

4

The American Economic Association provides EconLit, an electronic bibliography of 

economics literature, including journal articles and working papers; JSTOR is a nonprofit 

service that offers a digital archive of academic journals; the NBER Working Paper Series 

is a database of working papers submitted by NBER researchers; and SSRN publishes 

abstracts and working papers submitted by researchers, journals, publishers and 

institutions. 
Appendix II: Scope and Methodology

Page 60 GAO-12-265 Municipal Securities 

(FINRA) policies and procedures for electronically surveilling RTRS data 

for potential violations of MSRB pricing and trade reporting rules; and 

FINRA and federal banking regulators’ (Office of the Comptroller of the 

Currency, or OCC; Federal Deposit Insurance Corporation, or FDIC; and 

Board of Governors of the Federal Reserve System, or the Federal 

Reserve) examination procedures for assessing broker-dealer 

compliance with these rules.

We also identified enforcement trends related to Rules G-14 and G-30. 

With respect to FINRA, we reviewed results of the periodic surveillance of 

trade data it conducted from 2006 to 2010 to monitor broker-dealers and 

bank dealers for potential violations of MSRB Rules G-14 and G-30. 

These results included the number of alerts FINRA’s surveillance 

programs generated on potential G-14 and G-30 violations, as well as the 

resolution (for example, no further review, cautionary action, etc.) of each 

alert. We also reviewed data from FINRA’s System for Tracking Activities 

for Regulatory Policy and Oversight (STAR), which tracks the life cycle of 

FINRA’s regulatory matters, on the number of municipal-related brokerdealer examinations FINRA conducted from 2006 to 2010, the number of 

those examinations that identified violations of MSRB Rules G-14 and G30, and the resolution of each examination. We conducted a reliability 

assessment of the FINRA data and determined they were reliable for our 

purpose. Specifically, we reviewed information on the STAR system and 

FINRA’s policies and procedures for ensuring the data entered into the 

STAR system were accurate and complete.

We reviewed a purposeful sample of 45 examinations FINRA conducted 

from 2006 to 2010 in which it identified violations of MSRB Rules G-14 and 

G-30. We reviewed these examinations to inform our understanding of how 

FINRA examiners applied their policies and procedures for assessing 

compliance with Rules G-14 and G-30. First, we selected all 11 

examinations that had both G-14 and G-30 violations. Next, we selected an 

additional 6 examinations with G-30 violations that were forwarded to other 

agencies (such as SEC) for further review or initiated for a specific cause, 

as opposed to routine examinations. Third, 8 examinations with G-30 

violations were selected systematically by selecting every 4th examination 

after ordering the remaining examinations with G-30 violations by the 

completion date. Finally, we similarly selected 20 additional examinations 

with G-14 violations by selecting every 20th examination from an ordered 
Appendix II: Scope and Methodology

Page 61 GAO-12-265 Municipal Securities 

listing of remaining examinations with G-14 violations.5

With respect to federal banking regulators’ enforcement of Rules G-14 

and G-30, we reviewed data on the number of bank dealer examinations 

each regulator conducted from 2006 to 2010 and the number of those 

examinations that identified violations of Rules G-14 and G-30, among 

other MSRB rules. We conducted a reliability assessment of the federal 

banking regulator data and determined they were reliable for our purpose. 

Specifically, we reviewed information from federal banking regulators on 

the systems from which they generated the data provided to us and their 

policies and procedures for ensuring the data were accurate and 

complete. From the examination data, we selected and reviewed 

examinations or their relevant excerpts to observe examples of cases in 

which the federal banking regulators identified violations of Rule G-14 or 

other MSRB rules.

We did not 

extrapolate the information in the sample examinations to the universe of 

municipal broker-dealer examinations. Rather, we drew examples from 

some of the examinations to illustrate concepts in the report.

6

We also identified trends in the incidences of late reporting of transactions 

(i.e., reported more than 15 minutes after the time of trade) by brokerdealers to the RTRS since its implementation in 2005. More specifically, 

we analyzed data on the number of late-reported trades MSRB identified 

each month from January 2005 to July 2011 and the total trades reported 

for those months. In reviewing these data, we carried out a data reliability 

assessment. To do so, we reviewed information on the processes and 

As with the FINRA examinations, we reviewed these 

examinations to inform our understanding of how federal banking 

examiners applied their policies and procedures for assessing compliance 

with Rules G-14 and G-30. We did not extrapolate the information to the 

universe of bank dealer examinations.

 

5

When we reviewed the FINRA examinations, we discovered that 1 of the examinations 

we had selected for a G-30 violation alone also included a G-14 violation. Thus, we 

actually reviewed 12 examinations with both a G-14 and a G-30 violation.

6

Because OCC, FDIC, and the Federal Reserve identified few examinations with Rule G14 violations and no examinations with G-30 violations, we expanded our sample to 

examinations with other violations (for example, MSRB Rule G-27 on supervision). This 

allowed us to see more examination reports and observe how these regulators conducted

their examinations in general. We reviewed a combined total of 15 examination reports 

from these regulators.
Appendix II: Scope and Methodology

Page 62 GAO-12-265 Municipal Securities 

procedures MSRB uses to identify late trades in RTRS. We determined 

these data were reliable for our purposes.

To identify trends in settlement failures in municipal securities transactions, 

we reviewed data from the National Securities Clearing Corporation

(NSCC). This self-regulatory organization (SRO) provides clearance and 

settlement services for a variety of securities, including equity, corporate, 

and municipal securities. Because NSCC typically does not track 

settlement failures by security type, we requested that NSCC perform a 

specialized query to provide us with this information. NSCC reviewed a 5-

day trading period, from June 6 to June 10, 2011, and provided us with the 

dollar value of municipal securities settlement failures, as well as the total 

dollar value of all settlement failures, for that period. We did not assess the 

reliability of these data because we used the data solely for descriptive 

purposes and not for the purpose of making recommendations or drawing 

conclusions about causality. However, we corroborated the data by asking 

regulators and market participants about their experience with municipal 

trade failures, and what they told us was consistent with the trends in the 

data.

To understand how SEC oversees the municipal market, we reviewed the 

SEC Office of Compliance Inspections and Examinations’ (OCIE) 

guidance for conducting oversight inspections of FINRA-registered 

broker-dealers, focusing on policies and procedures for assessing 

compliance with MSRB rules related to pricing and trade reporting, and 

we reviewed OCIE’s guidance for conducting inspections of SROs. We 

reviewed data from OCIE on broker-dealer examinations it conducted 

from 2002 to 2010 that assessed compliance with municipal securities 

rules and regulations, including information on the MSRB rule violations 

examiners identified. We conducted a reliability assessment of these data 

and determined that there were limitations to how we could use them. We 

reviewed information on OCIE’s system for tracking examination data (the 

Super Tracking and Reporting System, or STARS), reviewed OCIE’s 

policies and procedures for ensuring the completeness and accuracy of 

the data, and interviewed OCIE officials. Although we determined that 

STARS data are reliable, we learned that STARS does not contain a 

unique field that allows users to retrieve all examinations with a municipal 

component. Rather, OCIE officials ran a report by searching for key 

words that, based on their experience with STARS data, were likely to be 

included in an examination with a municipal component. This produced a 

list of approximately 1,100 examinations conducted from 2002 to 2010. 

We determined this was a reasonable way to proceed to identify a 
Appendix II: Scope and Methodology

Page 63 GAO-12-265 Municipal Securities 

significant portion of the targeted universe of examinations from which we 

would draw selected exams for our review.

We reviewed a purposeful sample of 35 examinations that OCIE 

conducted from 2002 to 2010 in which it identified violations of MSRB 

Rules G-14 and G-30. First, we selected all 13 examinations that had G30 violations. Four of these examinations also had G-14 violations. We 

then selected an additional 22 examinations with G-14 violations (from a 

total of 80 examinations with G-14 violations during the time period). For 

the latter group, we attempted to select examinations representing the 

entire time period and a variety of recommended actions (from minor 

deficiency letters to enforcement referrals). We reviewed the 

examinations to understand how OCIE examiners applied OCIE’s 

examination policies and procedures to assess broker-dealers for 

compliance with MSRB rules. However, we did not cite any OCIE 

examination statistics in the report, given that the list of 1,100 

examinations may not have included all municipal examinations OCIE 

conducted from 2002 to 2010, as well as the fact that OCIE uses a riskbased method and does not necessarily review for broker-dealer 

compliance with Rules G-30 and G-14 in every examination.7 We also 

reviewed OCIE’s 2002 and 2005 inspections of MSRB and FINRA’s fixedincome program, focusing on OCIE’s review of FINRA’s surveillance, 

examination, and enforcement programs for overseeing municipal 

securities trading.8

We also reviewed meeting minutes, e-mails, training presentations, 

MSRB’s memorandum of understanding with FINRA, and other relevant 

documentation from MSRB to understand the coordination among SEC, 

In addition, we reviewed MSRB’s and FINRA’s 

responses to OCIE’s inspection reports. Finally we reviewed OCIE’s 

inspections of FINRA’s district offices from 2000 to 2010 and its 2009 

inspections of the Depository Trust Company and NSCC, SROs that clear 

and settle municipal securities transactions.

 

7

When we requested the OCIE examinations in March 2011, we had not yet narrowed our 

scope to Rules G-30 and G-14. Therefore, we requested and reviewed examinations that 

had violations of several other MSRB rules. The number of examinations we reviewed that 

involved G-30 or G-14 violations were 13 and 26, respectively. 

8

The fixed-income inspections we reviewed were of the National Association of Securities 

Dealers (NASD), which formerly acted as the SRO for broker-dealers. In July 2007, NASD 

assumed the broker-dealer regulatory functions of the New York Stock Exchange and 

became FINRA.
Appendix II: Scope and Methodology

Page 64 GAO-12-265 Municipal Securities 

MSRB, FINRA, and federal banking regulators in conducting oversight of 

the municipal securities market. Finally, we interviewed officials from 

OCIE, Office of Municipal Securities, SEC’s Division of Enforcement, 

MSRB, FINRA, and federal banking regulators to better understand their 

oversight of the municipal securities market and efforts to coordinate their 

oversight activities.

We conducted this performance audit from November 2010 to January 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives.
Appendix III: GAO Analysis of MSRB Trade 

Data, 2005-2010 

Page 65 GAO-12-265 Municipal Securities 

To understand how trade prices for individual investors differ from those 

for institutional investors, we analyzed trade data on newly issued fixedrate municipal securities from the Municipal Securities Rulemaking 

Board’s Real-Time Trade Reporting System from January 1, 2005, 

through December 31, 2010, using trade size as a proxy for whether the 

trade involved institutional or individual investors.1 We focused on trades 

that occurred within the period from 30 days prior to and 120 days after 

the dated date on municipal securities. We chose to examine this time 

frame because we observed that (1) securities in our sample trade most 

frequently around the time of issuance, (2) trading activity declines within 

days after issuance, and (3) trading activity has typically leveled off by 

about 120 days after issuance. Focusing on a period with more trading 

activity improves the precision with which we measure the relationships 

described below.2

First, we analyzed how relative prices—defined as trade prices as a 

percentage of the reoffering prices (the prices at which the securities 

were originally sold to the public by the underwriter)—changed as trade 

size increased for different types of trades (dealer sales to investors and

dealer purchases from investors). To do so, we estimated regressions on 

security trades. The dependent variables in these regressions are the 

relative price of a trade, and the independent variables in these 

regressions are trade amount interacted with trade type and indicator 

variables for each security in the sample. The security indicators control 

for time-invariant features of a security that may affect the relative price at 

which it trades. We estimated separate regressions for securities issued 

in each year from 2005 through 2010. We present our regression results 

in table 6. Our analysis shows that, relative to institutional investors, 

individual investors generally pay higher prices when buying—and 

receive lower prices when selling—municipal securities.

We chose to examine only trades of newly issued 

bonds to ensure that all the trades we analyzed involved bonds that had 

been available to investors for a similar amount of time and to limit the 

likelihood that unobserved, time-varying characteristics of bonds influence 

our analysis.

 

1

According to market participants, most trades by individual investors are $100,000 or 

less, while most trades by institutional investors are more than $1 million. MSRB data do 

not identify the kind of investor involved in a trade; therefore, we use trade size as a proxy 

for the kind of investor.

2

See appendix II for additional information on our methodology for constructing the data 

used in our analyses.

Appendix III: GAO Analysis of MSRB Trade 

Data, 2005-2010 
Appendix III: GAO Analysis of MSRB Trade 

Data, 2005-2010 

Page 66 GAO-12-265 Municipal Securities 

• Relative prices at which broker-dealers sold securities to investors 

declined on average with trade amount for all years in the analysis.

For all years, this negative relationship is statistically significant at the 

1 percent level.

• Relative prices at which broker-dealers purchased securities from 

investors increased with trade amount for bonds issued in every year 

except 2009. For every year except 2009, this positive relationship is 

statistically significant at the 1 percent level. For 2009, this 

relationship is negative but it is not statistically significant from zero.

Table 6: Percentage Change in Relative Price per 1 Percent Change in Trade 

Amount, by Trade Type and Year, 2005-2010

Year

Broker-dealer sales 

to investors

Broker-dealer purchases 

from investors

2005 -0.0017% 0.0018%

[73.64] [24.94] a

2006 -0.0020% 0.0011%

[79.39] [18.21]

2007 -0.0018% 0.0016%

[62.49] [21.64]

2008 -0.0015% 0.0033%

[24.09] [14.88]

2009 -0.0022% -0.0003%

[44.39] [1.60]

2010 -0.0020% 0.0010%

[48.94] [7.99]

Source: GAO analysis of data from MSRB.

a

Brackets contain t-statistics calculated using standard errors that are adjusted for heteroskedasticity 

and for within-bond correlation. For all years, the relationship between relative trade price and trade 

amount is negative for dealer sales to customers, and the negative relationship is statistically 

significant at the 1 percent level. For every year except 2009, the relationship between relative trade 

price and trade amount is positive for dealer purchases from customers, and the positive relationship 

is statistically significant at the 1 percent level. For 2009, the relationship between relative trade price 

and trade amount is negative for dealer purchases from customers, but it is not statistically 

significantly different from zero. For all years and for all trade types, the relationship between price 

dispersion and trade amount is negative, and the negative relationship is statistically significant at the 

1 percent level. 

Second, we analyzed how broker-dealers’ spreads—defined as the 

difference between the price on dealer sales to investors and the price on 

dealer purchases from investors as a percentage of the price on dealer 

purchases—changed as trade size increased, using three different 
Appendix III: GAO Analysis of MSRB Trade 

Data, 2005-2010 

Page 67 GAO-12-265 Municipal Securities 

measures of spread. For this analysis, we estimated regressions on 

securities. The dependent variables in these regressions are the spread 

on a security over a $10,000 trade amount increment, and the 

independent variables in these regressions are trade amount and 

indicator variables for each security in the sample. The security indicators 

control for time-invariant features of a security that may affect its spread.

We estimated separate regressions for securities issued in each year 

from 2005 through 2010. We present our regression results in table 7. 

Our analysis showed, on average, broker-dealers receive larger spreads 

when trading smaller blocks of municipal securities. For all years and for 

all three measures of spread, this relationship is statistically significant at 

the 1 percent level.

• The inside spread, which estimated a lower bound for broker-dealer 

spreads, declined as trade size increased for all years in the 

analysis.3

• The mean spread, which estimated average broker-dealer spreads, 

declined as trade size increased for all years in the analysis.4

• The outside spread, which estimated an upper bound for brokerdealer spreads, declined as trade size increased for all years in the 

analysis.5

 

3

The inside spread is the difference between the lowest trade price on a dealer sale and 

the highest trade price on a dealer purchase as a percentage of the highest trade price on 

a dealer purchase.

4

The mean spread is the difference between the mean trade price on a dealer sale and 

the mean trade price on a dealer purchase as a percentage of the mean trade price on a 

dealer purchase.

5

The outside spread is the difference between the highest trade price on a dealer sale and 

the lowest trade price on a dealer purchase as a percentage of the lowest trade price on a 

dealer purchase.
Appendix III: GAO Analysis of MSRB Trade 

Data, 2005-2010 

Page 68 GAO-12-265 Municipal Securities 

Table 7: Percentage Change in Spread per $10,000 Increase in Trade Amount, by 

Year, 2005-2010

Year Inside spread Mean spread Outside spread

2005 -0.22% -0.29% -0.33%

[8.73] [14.50] a [17.77]

2006 -0.19% -0.23% -0.25%

[9.71] [13.43] [17.06]

2007 -0.16% -0.19% -0.20%

[9.51] [13.68] [18.31]

2008 -0.23% -0.33% -0.47%

[8.12] [13.31] [22.16]

2009 -0.31% -0.41% -0.53%

[10.45] [19.52] [30.38]

2010 -0.35% -0.42% -0.47%

[14.72] [20.34] [29.26]

Source: GAO analysis of data from MSRB.

a

Brackets contain the absolute values of t-statistics calculated using standard errors that are adjusted 

for heteroskedasticity and for within-bond correlation. For all years and for all three measures of 

spread, the relationship between spread and trade amount is negative, and the negative relationship 

is statistically significant at the 1 percent level. 

Third, we analyzed how price dispersion, defined as the difference 

between the maximum and minimum trade price as a percentage of 

average trade price, changed as trade size increased. For this analysis, 

we again estimated regressions on securities. The dependent variables in 

these regressions are the price dispersion over a $10,000 trade amount 

increment, and the independent variables in these regressions are trade 

amount interacted with trade type and indicator variables for each security 

in the sample. The security indicators control for time-invariant features of 

a security that may affect its price dispersion. We estimated separate 

regressions for securities issued in each year from 2005 through 2010.

See table 8 for the regression results. Our analysis showed that prices for 

larger trades tended to be more concentrated, while prices for smaller 

trades tended to be more dispersed. For all years, this relationship is 

statistically significant at the 1 percent level.

• For broker-dealer sales to investors, the measure of dispersion 

declined as trade amount increased.

• For broker-dealer purchases from investors, the measure of 

dispersion also declined as trade amount increased.
Appendix III: GAO Analysis of MSRB Trade 

Data, 2005-2010 

Page 69 GAO-12-265 Municipal Securities 

Table 8: Change in Price Dispersion per $10,000 Increase in Trade Amount (in Basis 

Points), by Trade Type and Year, 2005-2010

Year

Broker-dealer sales to 

investors

Broker-dealer purchases from 

investors

2005 -0.14% -0.04%

[45.64] [11.53] a

2006 -0.11% -0.03%

[47.53] [11.11]

2007 -0.13% -0.04%

[38.02] [9.74]

2008 -0.41% -0.26% 

[52.39] [18.54]

2009 -0.39% -0.19%

[65.81] [14.60]

2010 -0.33% -0.15%

[68.79] [17.96]

Source: GAO analysis of data from MSRB.

a

Brackets contain the absolute values of t-statistics calculated using standard errors that are adjusted 

for heteroskedasticity and for within-bond correlation. For all years and for all trade types, the 

relationship between price dispersion and trade amount is negative, and the negative relationship is 

statistically significant at the 1 percent level. 
Appendix IV: Municipal Securities Rulemaking 

Board Expenses and Revenues Related to the 

Market Information Transparency Programs

Page 70 GAO-12-265 Municipal Securities 

The Municipal Securities Rulemaking Board intends for its Market 

Information Transparency Programs (Transparency Programs) to protect 

investors by fostering availabilty and transparency of critical information 

about municipal securities and market activity. From fiscal years 2004 

through 2010, MSRB spent significant resources developing and 

operating these programs. MSRB’s total revenue has fluctuated during 

this period. To generate additional revenues to continue to enhance and 

maintain these transparency programs, in fiscal year 2010 MSRB 

increased transaction fees for broker-dealers and imposed a new 

technology fee.

MSRB currently implements five transparency programs that 

coordinate the collection and dissemination of specific market information.

• Primary Market Disclosure Program: manages official statements 

and other primary market documents about new issues of municipal 

securities.

• Continuing Disclosure Program: manages ongoing disclosures 

about existing municipal securities.

• Transaction Data Program: collects and disseminates real-time 

municipal trade price information.

• Short-Term Disclosure Program: manages interest rate and related 

information about auction rate securities and variable rate demand 

obligations.

• Political Contribution Disclosure Program: manages quarterly 

reports of political contributions and municipal securities business 

from municipal securities dealers active in the new issue market in 

connection with MSRB Rule G-37.1

 

1

MSRB Rule G-37 prohibits municipal securities dealers from engaging in municipal 

securities business with issuers if certain political contributions have been made to 

officials of such issuers. It also requires them to disclose certain political contributions to 

MSRB to allow for regulatory and public scrutiny. Political contribution disclosure 

information is available at www.msrb.org. 

Appendix IV: Municipal Securities Rulemaking 

Board Expenses and Revenues Related to the 

Market Information Transparency Programs

MSRB’s Transparency 

Programs Make Municipal 

Data and Documents 

Publicly Available
Appendix IV: Municipal Securities Rulemaking 

Board Expenses and Revenues Related to the 

Market Information Transparency Programs

Page 71 GAO-12-265 Municipal Securities 

MSRB makes available most data and documents it collects to the 

public at no charge on its Electronic Municipal Market Access (EMMA) 

website.2 MSRB launched the EMMA website in 2008.3

MSRB staff told us that they are developing a 5-year plan that will guide 

future enhancements to the EMMA website. In doing so, they said they 

will consider what improvements would make the EMMA website more 

meaningful and useful, how MSRB can help individual investors 

understand what information they need and acquire that information, and 

whether MSRB is in a position to acquire such information in a reliable 

manner for posting to the system. They said that the planning will focus 

on how data are organized in the system and the parameters by which 

different types of users might want to search the data. MSRB staff also 

said that as the market in general has increasingly come to rely on the 

The EMMA 

website makes trade prices available on a real-time basis along with 

historical market trading information dating back to January 31, 2005, and 

issuer’s continuing disclosure documents are available for disclosures 

posted to the EMMA website beginning in July 2009. New issue 

disclosure documents are available for issues dating back to 1990. The 

EMMA website also provides information on the market and investor 

educational material and offering documents for municipal fund securities.

 

2

http://emma.msrb.org/. 

3

Prior to the Transparency Programs, MSRB operated the Municipal Securities 

Information Library (MSIL), which collected, stored, and provided subscription access to 

some municipal securities market information, including issuer official statements, 

advance refunding documents, and a limited number of material event notices through a 

continuing disclosure subsystem of MSIL (CDINet). MSIL also maintained files for public 

access to information about political contributions and municipal securities business 

submitted by municipal securities dealers active in the new issue market. In addition, 

MSRB operated the Trade Reporting System (TRS), which provided next-day public 

dissemination of reported municipal securities trades. In January 2005, MSRB replaced 

the TRS system with the Real-Time Transaction Reporting System. The data in that 

system were available only to subscribers, although the subscription feed data were made 

available to the public through the InvestingInBonds.com website of The Bond Market 

Association (now known as the Securities Industry and Financial Markets Association).

When MSRB launched the EMMA website in 2008 as a pilot, MSRB began making its 

official statements and advanced refunding documents collected through MSIL and trade 

prices collected through RTRS publicly available through the EMMA website. In 2009 

MSRB formally initiated the Primary Market Disclosure Program (replacing most elements 

of MSIL) and the Transaction Data Program (incorporating RTRS), the Short-Term 

Disclosure Program, and the Continuing Disclosure Program (replacing CDINet) and 

continued to provide access to information on political contributions through the Political 

Contribution Disclosure Program. 
Appendix IV: Municipal Securities Rulemaking 

Board Expenses and Revenues Related to the 

Market Information Transparency Programs

Page 72 GAO-12-265 Municipal Securities 

EMMA website, they will consider the needs of institutional investors and 

issuers as well as individual investors. MSRB staff told us that once the 

board approves the 5-year plan, they will release a summary version of it 

to the public.

As table 9 shows, MSRB’s expenses related to developing and operating 

its Transparency Programs increased significantly over recent years, from 

about $4.8 million in fiscal year 2004 to about $11.3 million in fiscal year 

2010, or from 35 percent to 49 percent of MSRB’s total expenses. Table 9 

also shows MSRB’s total expenses increasing over 70 percent between 

fiscal year 2004 and fiscal year 2010, from about $13.6 million to about 

$23.1 million. 

Table 9: MSRB Expenses, Fiscal Years 2004-2010

Year ended September 30

Expenses 2004 2005 2006 2007 2008 2009 2010

Market Information 

Transparency Programs 

and operations

$4,769,029 

a

$7,216,980 $7,240,392 $6,844,783 $7,224,140 $10,073,932 $11,319,323

Administration and 

operations

3,754,430 4,514,109 4,619,281 5,648,682 4,619,132 5,612,560 5,909,092 

Rulemaking and policy 

development

2,930,805 3,613,446 3,605,787 3,614,750 4,253,688 2,994,537 3,030,192 

Board and committee 1,110,212 1,134,080 1,283,029 1,566,723 1,545,968 1,473,049 1,625,522 

Professional 

qualifications

744,469 731,878 736,268 758,473 741,022 616,748 463,133 

Education and 

communications

321,444 212,660 149,601 178,870 177,601 510,434 784,146 

Total expenses $13,630,389 $17,423,153 $17,634,358 $18,612,281 $18,561,551 $ 21,281,260 $23,131,408

Source: GAO analysis of MSRB audited financial statements.

a

In fiscal year 2004, MSRB operated MSIL, which collected, stored, and provided access to certain 

municipal securities market information. The data in this system were only available to subscribers. In 

fiscal year 2005, MSRB implemented the Real-Time Trade Reporting System, but again the data in 

the system were only available to subscribers. During fiscal years 2008 and 2009, MSRB 

implemented the EMMA website, which replaced MSIL and offered market disclosures and data, 

including RTRS data, to the public. 

MSRB stated that its total operating expenses increased to approximately 

$26.1 million in fiscal year 2011 (a 13 percent increase over those of 

fiscal year 2010), and that it anticipates that its total operating expenses 

will increase to approximately $29.4 million in fiscal year 2012 (a 27 

percent increase over those of fiscal year 2010). MSRB stated that a 

Transparency Program 

Expenses Increased 

Significantly from Fiscal 

Years 2004 through 2010
Appendix IV: Municipal Securities Rulemaking 

Board Expenses and Revenues Related to the 

Market Information Transparency Programs

Page 73 GAO-12-265 Municipal Securities 

significant part of these increases are due to anticipated expenses related 

to the Transparency Programs, such as replacing aging and outdated 

technology systems and new technology initiatives. Other anticipated 

expenses are related to rulemaking activities required under the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 

and other information systems needed to fulfill MSRB’s mission.

MSRB has relied mostly on the underwriting and transaction fees it collects 

from broker-dealers to fund its expenses, including those related to the 

Transparency Programs. Table 10 shows that these fees accounted for 

between 90 and 92 percent of total revenues for fiscal years 2004-2010. 

Table 10: MSRB Revenues, Fiscal Years 2004-2010

Year ended September 30

Revenues 2004 2005 2006 2007 2008 2009 2010

Underwriting 

assessment fees

$9,752,383 $11,149,597 $9,852,226 $12,456,134 $12,188,220 $10,837,652 $13,984,780

Transaction fees 5,421,603 5,611,792 6,198,630 6,893, 813 7,723,365 7,150,905 6,940,551

Annual fees 744,800 712,300 684,800 663,300 644,864 622,700 1,010,321

Data subscriber fees 238,523 466,000 406,295 375,066 390,210 441,392 509,547

Professional 

qualification 

examination fees

N/A

a

N/A b N/A N/A N/A N/A 92,220

Initial fees 12,900 8,800 9,600 8,500 8,800 8,400 8,500

Investment return 107,802 210,043 601,322 1,008,422 1,123,096 533,667 92,715

Publications and other 

Income

258,347 22,909 16,067 69,859 72,194 33,268 41,612

Total revenues $16,536,358 $18,181,441 $17,768,940 $21,475,094 $22,150,749 $19,627,984 $22,680,246

Underwriting 

assessment and 

transaction fees as a 

percentage of total 

revenue

92% 92% 90% 90% 90% 92% 92% 

Source: GAO analysis of MSRB audited financial statements.

a

In November 2009, MSRB filed a new rule that established an examination fee of $60 assessed on 

persons taking certain qualification examinations as of January 4, 2010. These examinations include 

the Series 51 (Municipal Fund Securities Limited Principal Qualification Examination), Series 52 

(Municipal Securities Representative Qualification Examination), and Series 53 (Municipal Securities 

Principal Qualification Examination). 

b

Not applicable. 

Table 10 also shows that MSRB’s total revenues declined by 11.4 percent 

from fiscal year 2008 to fiscal year 2009, which MSRB attributed to the 
Appendix IV: Municipal Securities Rulemaking 

Board Expenses and Revenues Related to the 

Market Information Transparency Programs

Page 74 GAO-12-265 Municipal Securities 

economic crisis and consequent decrease in transaction fees and 

underwriting assessment fees collected. This decline in revenues 

occurred when expenses were increasing, as shown in figure 2. 

Figure 2: MSRB Revenues and Expenses, Fiscal Years 2004 through 2010

To establish a more stable long-term revenue base as well as ensure a 

more equitable allocation of assessments among the municipal brokerdealers that fund MSRB’s operations, MSRB authorized changes to its 

revenue sources in fiscal year 2011 that it expects will generate 

significant new revenues. First, MSRB increased the transaction fee 

charged to broker-dealers from $0.005 per $1,000 par value to $0.01 per 

$1,000 par value on most municipal securities sales transactions reported 

to MSRB. The new fee became effective in January 2011. MSRB expects 

the increased transaction fee to generate an estimated $7 million 

annually. Second, effective January 2011, dealers in municipal securities 

are required to pay a technology fee of $1.00 per transaction for all sales 

transactions. MSRB expects the technology fee to generate an estimated 

$8.5 million annually. MSRB stated that the technology fee would be 

MSRB Increased the 

Transaction Fee and 

Levied a New 

Technology Fee to 

Generate Additional 

Revenues
Appendix IV: Municipal Securities Rulemaking 

Board Expenses and Revenues Related to the 

Market Information Transparency Programs

Page 75 GAO-12-265 Municipal Securities 

transitional in nature and that it would review the fee periodically to 

determine whether it should continue to be assessed.4

MSRB said that these new and increased fees are necessary because its 

expenses have increased significantly as a consequence of its capital 

investments in technology and the regulatory responsibilities it has 

assumed under the Dodd-Frank Act. MSRB said it would use the new 

technology fee to establish a technology renewal fund, which would be 

segregated for accounting purposes. The technology renewal fund is 

intended to fund replacement of aging and outdated technology and to 

fund new technology initiatives. For example, MSRB noted that certain of 

the existing public information systems it operates, including RTRS, now 

rely on dated technology and can be expected to need comprehensive 

reengineering in the coming years. In addition, MSRB said that it will need 

to develop information systems to facilitate its increased regulatory 

responsibilities under the Dodd-Frank Act, which, among other things, 

broadened its mission to include the protection of municipal issuers and 

extended its regulatory authority to include municipal advisers.

The Dodd-Frank Act provided for additional revenue sources for MSRB, 

although these revenues are unlikely to represent a significant source of 

funding. The Dodd-Frank Act expanded the regulatory jurisdiction of 

MSRB to include municipal advisers. MSRB amended its rules in 

November 2010 to begin collecting initial fees ($100) and annual 

registration fees ($500) for municipal advisers. However, MSRB officials 

said that they did not anticipate these fees would provide a revenue 

stream comparable to what MSRB receives from all fees on broker-dealer 

activities, including the transaction, underwriting, and technology fees 

previously discussed. The Dodd-Frank Act also mandated that SEC and 

the Financial Industry Regulatory Authority, Inc., remit to MSRB a portion 

of the fines collected for violation of MSRB rules. Effective October 2010, 

SEC must remit half of the fines it collects to MSRB, and FINRA must 

 

4

MSRB also increased other fees and assessments in fiscal years 2009 and 2010, but 

MSRB staff do not anticipate that these will generate significant sources of revenue to 

mitigate the costs of the Transparency Programs. These actions included amending its 

underwriting assessment to remove certain exemptions and to establish a single uniform 

assessment rate of $0.03 per $1,000 par value, increasing its annual registration fee from 

$300 to $500 for dealers, adding a new fee to be assessed on individuals taking certain 

professional qualifications examinations, and increasing subscription fees to its real-time 

feeds of trade data and disclosure documents associated with new and existing municipal 

security issues.
Appendix IV: Municipal Securities Rulemaking 

Board Expenses and Revenues Related to the 

Market Information Transparency Programs

Page 76 GAO-12-265 Municipal Securities 

remit one-third, although that amount may be modified by agreement 

among SEC, MSRB, and FINRA. MSRB stated that the amounts actually 

received will be dependent on the level of enforcement by SEC and 

MSRB and is expected to vary considerably from year to year.
Appendix V: Selected SEC Cases and Opinions 

Involving Excessive Municipal Securities 

Markups and Markdowns

Page 77 GAO-12-265 Municipal Securities 

Since the early 1970s, several Securities and Exchange Commission 

cases and opinions have addressed instances in which broker-dealers 

charged excessive markups or markdowns in municipal securities 

transactions with customers. Table 11 summarizes the details of a few of 

these cases.

Table 11: Selected SEC Cases and Opinions Involving Excessive Municipal Securities Markups and Markdowns, 1970-2011

Case Year Findings

SEC v. Charles A. Morris & Associates, 

Inc., et al

(U.S. District Court)

1974 SEC ordered a permanent injunction against the firm. Among other things, the 

District Court and SEC found the defendant had been selling bonds at prices 

not reasonably related to the prevailing market prices and charging markups 

ranging from 25 percent to 100 percent over the prices at which recent 

interdealer trades occurred. 

Staten Securities Corporation

(SEC Review of NASD Disciplinary 

Proceedings)

1982

a

SEC upheld NASD’s findings that the firm’s markups, ranging from 5.1 percent 

to 6.7 percent, were excessive. SEC found that the securities were readily 

available in the marketplace with easily ascertainable prices, the firm was not at 

risk with respect to any of the transactions, and the firm did not incur any 

unusual expense in effecting the transactions. SEC also stated in this case that 

markups of 5 percent or less are not necessarily fair and reasonable. SEC 

upheld NASD’s penalties, which censured the firm, imposed joint and individual 

fines of $2,000, and prohibited the firm’s president and principal shareholder 

from supervising or effecting principal transactions in municipal securities with 

public customers until he took and passed a municipal securities principal 

qualification examination.

First Honolulu Securities, Inc.

(SEC Review of NASD Disciplinary 

Proceedings)

1993 SEC upheld NASD’s findings of violation for markups above 5 percent, but it set 

aside NASD’s findings of violations for markups below 5 percent. SEC noted in 

its decision that, while it agreed that the markups below 5 percent were likely 

unfair, it may not have been clear when the transactions occurred in 1990 that 

markups between 4 percent and 5 percent usually are unfair, since SEC had 

not dealt with enforcement cases for markups below 5 percent until 1993. SEC 

also noted that it set aside findings of excessive markups that were below 4 

percent because NASD had not introduced any evidence to establish the 

unfairness of markups at those levels, but noted that markups below 4 percent 

may well have been unfair. The firm was censured and fined $7,400. 

Mark David Anderson

(SEC Opinion)

2003 SEC imposed substantial monetary sanctions and a cease and desist order 

against a broker-dealer who, in the mid-1990s, had charged retail customers 

markups ranging from 1.42 percent to 5 percent and markdowns ranging from 

3.02 percent to 5.64 percent. Most of the transactions in question were 

executed on a “riskless principal” basis, in which the defendant knew he had a 

buyer and a seller in place prior to executing the trade. SEC concluded that the 

markups and markdowns deviated significantly from industry norms. SEC 

rejected the defendant’s argument that his aggregate prices were fair because 

the securities offered competitive yields.

Sources: Lexis, SEC, and Westlaw.

a

The National Association of Securities Dealers (NASD) formerly acted as the self-regulatory 

organization for broker-dealers. In July 2007, NASD assumed the broker-dealer regulatory functions 

of the New York Stock Exchange and became FINRA. 

Appendix V: Selected SEC Cases and 

Opinions Involving Excessive Municipal 

Securities Markups and Markdowns
Appendix VI: Regulators’ Policies and 

Procedures for Monitoring Compliance with 

MSRB Rules G-30 and G-14 

Page 78 GAO-12-265 Municipal Securities 

The Financial Industry Regulatory Authority, Inc., the federal banking 

regulators, and the Securities and Exchange Commission use a variety of 

methods to help ensure broker-dealers’ compliance with rules issued by 

the Municipal Securities Rulemaking Board. We reviewed their written 

policies and procedures to understand how they assess broker-dealers’ 

compliance with MSRB Rules G-30 (fair and reasonable pricing) and G14 (timely, accurate, and complete trade reporting). FINRA has 

established electronic surveillances of data reported to MSRB’s RealTime Transaction Reporting System, by which it analyzes the data to 

generate “alerts” for potential violations of certain MSRB rules. FINRA, in 

certain circumstances, refers potential violations by bank dealers to the 

appropriate federal banking regulators for further investigation. During the 

period of our review, MSRB Rule G-16 required FINRA and the federal 

banking regulators to conduct routine examinations of the firms under 

their jurisdiction once every 2 years for compliance with all MSRB rules 

and other applicable laws.

1 The SEC’s Office of Compliance Inspections 

and Examinations also conducts oversight activities through examinations

of selected broker-dealers.

FINRA utilizes parameters to help target its surveillance for fair pricing 

and markup violations. For example, a surveillance program established 

to identify transactions that were not executed at the prevailing market 

price would flag any transactions priced outside of a certain range of 

comparable prices. Similarly, a surveillance program established to 

identify excessive markups or markdowns would flag any transactions 

with markups or markdowns above a specified percentage of the 

contemporaneous costs (for markups) or proceeds (for markdowns). 

FINRA staff stated that these parameters are merely guidelines to assist 

 

1

On December 16, 2011, SEC approved a MSRB proposed rule change that included an 

amendment to MSRB Rule G-16, which had required FINRA and the federal banking 

regulators to examine broker-dealers at least once every 2 calendar years to determine 

their compliance with all applicable MSRB rules, as well as other SEC rules and 

regulations. The amended rule allows for up to a 4-year examination cycle for FINRA 

member firms, consistent with FINRA’s existing requirement for examination cycles for all 

other FINRA members. According to MSRB, broker-dealer firms that present higher risks 

would be examined on an annual basis, while other firms would be examined every 2 to 4 

years, depending on the risks they presented. Cycle examination frequencies for FINRA 

member broker-dealer firms would be reassessed at least on an annual basis. 

Appendix VI: Regulators’ Policies and 

Procedures for Monitoring Compliance with 

MSRB Rules G-30 and G-14 

FINRA

Rule G-30 
Appendix VI: Regulators’ Policies and 

Procedures for Monitoring Compliance with 

MSRB Rules G-30 and G-14 

Page 79 GAO-12-265 Municipal Securities 

them in identifying transactions for further review. FINRA analysts follow a 

series of steps to determine whether alerts generated by the surveillances 

represent actual violations of Rule G-30. Specifically:

• The analyst uses various data sources, such as Bloomberg, MSRB’s 

Electronic Municipal Market Access website, or audit trail data, to 

verify the information in the alert and confirm or establish the 

prevailing market price for the municipal security at the time of the 

trade in question.

• If necessary, the analyst asks the firm for documentation and an 

explanation of how it determined that its price and markup or 

markdown were fair and reasonable.

• After reviewing the firm’s documentation, the analyst prepares a 

memorandum recommending a particular disposition for review and 

approval by FINRA managers.

In their G-30 compliance reviews during broker-dealer examinations, 

FINRA examiners check for price manipulation and excessive markups 

and markdowns. The manipulation module of FINRA’s examination tool 

kit includes several questions and warning signs that help examiners 

identify whether broker-dealer firms intentionally tried to manipulate 

prices. FINRA’s examination tool kit also contains a module to help 

examiners identify excessive markups or markdowns. Examiners follow a 

series of steps:

• Examiners collect a variety of records from the firm, such as order 

tickets and confirmations for a given sample of transactions, as well 

as daily transaction reports.

• Using MSRB data, they identify a comparison transaction that best 

represents the market (i.e., the prevailing market price) for each 

sample security at the time of each sample customer transaction.

• Using the comparison transaction data and records collected from the 

firm, examiners calculate the markups and markdowns that the firm 

charged on the sample transactions.

• For markups or markdowns outside of specific parameters, examiners 

request an explanation from the firm. Again, the parameters are 

merely guidelines to assist them in identifying transactions for further 

review.
Appendix VI: Regulators’ Policies and 

Procedures for Monitoring Compliance with 

MSRB Rules G-30 and G-14 

Page 80 GAO-12-265 Municipal Securities 

• Examiners consider the facts and circumstances of each individual 

case and, when necessary, consult with FINRA fixed-income experts 

to substantiate violations.

FINRA’s periodic late trade reporting surveillance identifies transactions 

reported more than 15 minutes after they occurred, with analysts 

following a similar review process as they follow for pricing and markup or 

markdown alerts.2

• FINRA reviews MSRB transaction data and selects firms with higher 

levels of potential noncompliance during a given surveillance period.

• As with surveillances for pricing and markups, analysts use various 

data sources, such as Bloomberg, the EMMA website, or audit trail 

information to provide context for each case.

• If necessary, the analyst asks the firm for documentation, including an 

explanation for the late reporting and any trade memorandums in 

support of that explanation, a copy of the firm’s written supervisory 

procedures regarding municipal securities transaction reporting, and 

any evidence of the firm’s own review of the transactions in question.

• The analyst reviews the documentation and prepares a memorandum 

recommending a particular disposition for review and approval by 

FINRA managers.

In their G-14 compliance reviews conducted during examinations, using a 

sample of trades from the firm’s trading blotters, FINRA examiners 

conduct a “failure to report” review to detect transactions that the firm 

effected but failed to report to MSRB. They also check whether firms have 

filed and kept current a Form RTRS with MSRB. This form contains 

information that ensures that the firm’s trade reports can be processed 

correctly. Finally, examiners look for unreported and inaccurately reported 

trades, as well as late reported trades that would not have been detected 

by FINRA’s surveillance activities. In doing so, they adhere to the 

following procedures:

 

2

FINRA also runs surveillance programs to identify other potential trade reporting issues, 

such as large (over a certain dollar amount) late reported trades, negative yields, 

excessive commissions, or unusual trade times, among other issues. 

Rule G-14
Appendix VI: Regulators’ Policies and 

Procedures for Monitoring Compliance with 

MSRB Rules G-30 and G-14 

Page 81 GAO-12-265 Municipal Securities 

• Examiners review monthly RTRS statistics on trades that the firm 

executed or cleared during the review period. They select a time 

period for review and run statistical reports related to each brokerdealer firm’s trade reporting for that time period. They also obtain 

detailed trade information from MSRB.

• Examiners then select a sample of trades from the time period they 

chose for review.

• For the selected sample, they request and review order tickets and 

confirmations from the firm and compare the RTRS information to the 

information on those documents, making note of differences between 

the two sources. For discrepancies noted, they attempt to determine 

the root cause of the apparent violations and, if necessary, expand 

their sample to confirm the violation.

The Office of the Comptroller of the Currency, the Federal Deposit 

Insurance Corporation, and the Board of Governors of the Federal 

Reserve System constitute the federal banking regulators that oversee 

those banks that are registered as dealers of municipal securities. In 

general, the three federal banking regulators’ examination policies and 

procedures require bank examiners to select a sample of the bank 

dealer’s transactions, review the relevant bank documentation and MSRB 

data for those transactions, and analyze the data to evaluate whether any 

prices appear to be unfair or unreasonable.

Federal banking regulator officials told us that bank examiners obtain and 

review MSRB transaction data prior to their on-site examinations. When 

conducting on-site bank dealer examinations, federal banking examiners 

generally select a sample of the bank dealers’ transactions for a given 

review period. They typically request and review copies of the bank’s 

transaction records for the review period and compare the bank’s records 

with MSRB transaction data to ensure that the bank reported all of its 

trades to MSRB accurately and on time.

Federal Banking 

Regulators

Rule G-30 

Rule G-14
Appendix VI: Regulators’ Policies and 

Procedures for Monitoring Compliance with 

MSRB Rules G-30 and G-14 

Page 82 GAO-12-265 Municipal Securities 

In checking for G-30 compliance during broker-dealer examinations, 

OCIE examiners generally take some or all of the following steps:

• Examiners review MSRB data to select a sample of the firm’s 

transactions that appear to have higher markups than other reported 

transactions in a given review period.

• Using order tickets, confirmations, and information on 

contemporaneous costs or proceeds, they calculate the markups or 

markdowns the firm charged on the sample transactions.

• Examiners ask the firm to explain cases that fall outside of certain 

parameters.

In checking for G-14 compliance during broker-dealer examinations, 

OCIE examiners generally do the following:

• Examiners select a population of municipal transactions for a given

review period.

• They compare the MSRB trade information with the information on the 

firm’s purchase and sales blotter to determine whether all transactions 

were reported.

• They also select a sample of order tickets and confirmations for the 

trades and compare that information with the MSRB report to check 

for accuracy of reporting.

OCIE

Rule G-30

Rule G-14
Appendix VII: Comments from the Securities 

and Exchange Commission 

Page 83 GAO-12-265 Municipal Securities 

Appendix VII: Comments from the Securities 

and Exchange Commission
Appendix VII: Comments from the Securities 

and Exchange Commission 

Page 84 GAO-12-265 Municipal Securities 
Appendix VIII: GAO Contact and Staff 

Acknowledgments

Page 85 GAO-12-265 Municipal Securities 

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov

In addition to the contact named above, Karen Tremba, Assistant 

Director; Pedro Almoguera; Silvia Arbelaez-Ellis; Ben Bolitzer; Emily 

Chalmers; William R. Chatlos; Rachel DeMarcus; Stefanie Jonkman; 

Courtney LaFountain; Marc Molino; Edward Nannenhorn; Robert Pollard; 

Lisa Reynolds; Jessica Sandler; and Ardith Spence made key 

contributions to this report.

Appendix VIII: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments

(250564)
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