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MSRB Rules Related to Mutual Securities

Instructor: N. Faye Angel

Faye has taught college classes in Business and Information Systems programs, and has a Ph.D. in Technical Education and an M.B.A. in Business Administration.

Rule D-12 was added by the Municipal Securities Rulemaking Board (MSRB) in 2000 to provide regulations for municipal fund securities and to establish reporting requirements as defined by Form G-45. This lesson provides an overview of MSRB Rules D-12 and G-45.

Definition and Overview of Rule D-12

LinRae, an investment company representative, has a customer that wants to purchase municipal fund securities. It is a relatively new product, and the MRSB has revised the guidelines several times from early 2015 to late 2018; she does not want to violate any rules that might impact the investor's return.

Rule D-12 was added by the Municipal Securities Rulemaking Board (MSRB) in 2000 to address municipal fund securities. It defined municipal fund securities as securities that would be issued by an investment bank (dealer) except for the exemption under the Investment Company Act of 1940, Section 2(b) which defines an investment company. The securities are sold by investment companies or dealers, which means they are not directly sold by state and local governments.

Offerings categorized as municipal fund securities must first be categorized as municipal securities and, as such, maintain their tax-exempt status. They should not be confused with mutual funds that are considered marketable securities issued by investment companies and do not have tax-exempt status.

Rule D-12 defined 'sophisticated municipal market professional' or SMMP to include three requirements:

  1. The nature of the customer: defines who the customer must be
  2. Dealer determination of customer sophistication: dealer has reason to believe that customers can independently assess risks and market value of security
  3. Customer affirmation: customer can make an independent judgement about the security and has timely access to information

Rule D-12 provides the investor with additional options for saving money by investing in municipal fund securities. They include:

  1. Local Government Investment Pools (LGIP)
  2. 529 Education Savings Accounts
  3. ABLE (Achieving a Better Life Experience) 529A Savings Account

LGIP

Local government investment pools (LGIP) are funds (in the form of surplus cash) pooled by state and local governments and placed into a trust of short-term investments. These aggregated funds are deposited in a diverse portfolio of funds, including corporate stock and bonds, mutual funds, and a variety of municipal securities.

Government agencies can withdraw these funds to meet their current obligations. Municipalities may 'cash them out' at any time.

Plan 529

The 529 education savings plan was established to allow individuals to save for qualified higher education expenses. In 2018, the plans were expanded to include educational expenses for K-12 public, private, and religious schools.

The contributors to a 529 education plan can live in one state, invest in another state, and use qualified funds to attend college in a third state. If withdrawals are used for expenses other than qualified educational ones, the amount is subject to federal income taxes and penalties.

Plan 529A - ABLE Accounts

The Achieving a Better Life Experience Act (ABLE--Plan 529A) allows individuals to save for those with disabilities, especially for future financial needs. The disability must have occurred before the age of 26.

The federal ABLE bill was passed in 2014. Virginia was the first state to pass legislation in 2015. Over 40 states plus the District of Columbia allow for savings for disabled persons.

Stephen Beck, Jr., a businessman, has been credited with the passage of the ABLE Act. His daughter had Down syndrome, and he advocated for all individuals with disabilities.

Form G-45

The MSRB created Form G-45 for the purpose of requiring underwriters and dealers of municipal fund securities to provide updated information. This applies to primary offerings for LGIP, Plan 529 and Plan 529A. Form G-25 is used for reports based on the Form G-45 manual.

a) These reports must be filed semi-annually and annually with the MSRB. Semi-annual information reports are due no later than 60 days after the end of the reporting periods which are June 30 and December 31, and annual performance reports are due 60 after the annual reporting period which is December 31.

b) Information related to the security must be submitted to MSRB on Form G-45 in an electronic format. If dealers or their representatives fail to submit the report, they are considered in violation or the rule and not in compliance with the rule.

c) G-15 manual should be used for reporting information on Form G-45.

d) Fourteen definitions are provided to clarify their meanings for completing Form G-45. These terms are included below in an abridged version.

i) assets: most securities products, various equities, fixed income offerings, bank securities, insurance products, commodities, and cash

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