Antifraud Regulation

While municipal securities are exempt from registration requirements under the Securities Act of 1933, they are not exempt from antifraud regulations. Under the Securities Acts Amendments of 1975, all antifraud regulations that apply to registered securities also apply to municipal securities.

The 1933 and 1934 Acts contain several rules that address fraudulent activity. The rules are summarized in the list below. These prohibitions apply to transactions conducted in both the primary and secondary markets. The exam may ask about any of these and it is important to learn them.

It is unlawful to use any “manipulative or deceptive” device when offering or selling a security.

Under Section 10(b) of the 1934 Act, all persons, including brokers, dealers, and municipal securities dealers and issuers, are subject to a general prohibition against the use of “any manipulative, deceptive, or other fraudulent device or contrivance” in conducting securities transactions.

“Manipulative, deceptive, or other fraudulent device or contrivance” is defined broadly by SEC Rule 15c1-2. It includes any act that would operate as fraud on any person and encompasses untrue and misleading statements and omissions of material facts. Even those who may not be intending to deceive another can be in violation of antifraud rules if they fail to correct a statement that they had reasonable grounds to believe was misleading.

Example: The State of Illinois fails to tell municipal bond buyers that its public retirement fund is not covering costs and is increasingly underfunded. As a result, municipal bond holders are not aware of the risk that Illinois may not be able to pay both retirees and bond holders and that they may have to compete for the same limited funds. Failing to disclose the true state of Illinois’ retirement fund would be a violation of antifraud rules by the State of Illinois.

It is unlawful to profit from untrue statement