Protection of Municipal Entities and Obligated Persons

With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, Congress broadened the MSRB’s original investor protection mandate to explicitly include, among other things, the protection of municipal securities issuers and other municipal entities, including 529 college savings plan and ABLE program sponsors, as well as government and local government investment pools (collectively, LGIPs). The mandate to protect municipal entities is unique among federal securities regulators, reflecting the important role of municipal entities in the creation and maintenance of essential public services nationwide. To assist the MSRB in fulfilling this expanded mandate, Congress extended the jurisdiction of the MSRB to include the regulation of municipal advisors that provide advice to municipal entities. 

Since 1975, the MSRB fulfills its original investor protection mission by establishing a comprehensive body of rules for municipal securities dealers, developing a series of market transparency systems and providing an increasing level of education and outreach to market participants. With the addition of municipal entities to its mandate, the MSRB has established the principles set out below to guide its regulatory, transparency and educational initiatives. 

The MSRB protects municipal entities by: 

  1. Establishing rules for municipal securities dealers and municipal advisors designed to promote fair, efficient and transparent transactions; prevent fraudulent, manipulative and other unfair practices; and address dealer and advisor conflicts of interest;
  2. Collecting and disseminating market information to ensure that the underwriting, trading and selling of municipal bonds, and advice on municipal securities and municipal financial products are conducted in compliance with MSRB rules;
  3. Providing market leadership, outreach and education to promote a broad market understanding of regulatory developments that may affect market participants; and
  4. Coordinating with governmental agencies and other regulatory and non-regulatory organizations to encourage effective municipal market regulation. 

Protection of 529 College Saving Plan Sponsors
In 1996 Congress added Section 529 to the U.S. Internal Revenue Code, paving the way for the creation of qualified tuition programs to encourage saving for future higher education costs by providing federal tax benefits. Forty-nine states and Washington, D.C. currently offer qualified tuition programs. Those states also may offer state income tax deductions as well as other incentives, such as financial aid treatment or potential grants, to encourage contributions to qualified tuition programs, including 529 college savings plans. 

Although the structure of most 529 college savings plans is similar to the structure of variable annuities, which are securities that generally are registered with the Securities and Exchange Commission, interests in these plans are considered municipal securities under federal securities laws and municipal fund securities under MSRB rules. 529 college savings plans exhibit a prime feature of most municipal securities-- earnings are generally excludable from the gross income of the account owner for federal income tax purposes. Further, because 529 college savings plans are considered municipal securities, the MSRB regulates, as discussed below, the financial professionals that provide services to such plans.

States that sponsor 529 college savings plans engage various financial professionals to provide services related to the creation and administration of the plans including underwriting, marketing, distribution and investment management, among other services. The activities of municipal securities dealers that underwrite or sell interests in 529 college savings plans and municipal advisors that provide related advisory services are subject to MSRB rules and other applicable provisions of the federal securities laws.

Learn more about 529 college savings plans.

Protection of ABLE Program Sponsors
In 2014, Congress added Section 529A to the U.S. Internal Revenue Code. Section 529A enables an eligible individual and his or her family to save money in a tax-advantaged savings account for qualified disability expenses while still retaining the individual’s eligibility for federal public benefits. States also may offer incentives to encourage contributions to ABLE programs.

Similar to 529 college savings plans, interests in ABLE programs generally are considered municipal securities under federal securities laws and municipal fund securities under MSRB rules. ABLE programs exhibit a prime feature of most municipal securities-- earnings are typically excludable from the gross income of the account owner for federal income tax purposes. Further, because ABLE programs generally are considered municipal securities, the MSRB regulates, as discussed below, the financial professionals that provide services to such programs.

States that sponsor ABLE programs engage various financial professionals to provide services related to the creation and administration of the plans including underwriting, marketing, distribution and investment management, among other services. The activities of municipal securities dealers that underwrite or sell interests in ABLE programs and municipal advisors that provide related advisory services are subject to MSRB rules and other applicable provisions of the federal securities laws.

Protection of Local Government Investment Pools
LGIPs are established by states to provide other governmental entities (e.g., cities, counties, school districts or other state agencies) with a short-term investment vehicle, often formed as a trust, to purchase shares or units in an investment portfolio. There are approximately 144 local government investment pools operating in 45 of the 50 states with an estimated $250 billion in assets under management.[1]

Many governmental entities adhere to established cash management policies that allow for investment of municipal cash into LGIPs and may choose to participate in an LGIP as part of a larger cash management strategy. LGIP participation may allow a municipality to benefit from economies of scale and full-time professional portfolio management while maintaining diversification of investments, safety of principal and liquidity. LGIPs assist in cash management practices by providing same-day liquidity, and, in many cases, check writing and wiring features. However, LGIP investments are not guaranteed.

Read more about LGIPs.



[1]  Only five states in the United States do not utilize government investment pools: Alabama, Hawaii, Mississippi, North Dakota and Vermont. Informa Business Intelligence, ImoneyNet, 2016.



 

...