Anti-Fraud Regulation

While municipal securities are exempt from registration, they are not exempt from anti-fraud regulations. Under the Securities Acts Amendments of 1975, all anti-fraud regulations that apply to registered securities also apply to municipal securities.

These anti-fraud provisions apply to persons, including municipal issuers, brokers, dealers, and municipal dealers.

The 1933 and 1934 Acts contain several rules that address fraudulent activity, summarized in the list that follows. 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 broker-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 or deceit on any person. This encompasses knowingly making untrue and misleading statements and omissions of material facts. Even those who may not be intending to deceive another can be in violation of anti-fraud rules if they fail to correct a statement 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 bondholders are not aware of the risk that Illinois may not be able to pay both retirees and bondholders 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 an