Municipal Fund Securities Overview
Before diving into specific products like 529 plans and ABLE accounts, you need to understand the regulatory category that groups them together.
What Are Municipal Fund Securities?
- Municipal fund securities are securities issued by a state or local government (or an agency thereof) and sold through a trust or program
- They are investment vehicles created by government entities to serve specific public purposes; primarily education savings and government cash management
- Unlike traditional municipal bonds, municipal fund securities represent shares or units in a pooled investment program rather than a debt obligation
Think of it this way: A municipal bond is a loan you make to a city or state. A municipal fund security is more like buying into a government-run savings program. You own shares in a pool, not a debt instrument.
Exam Tip: Gotchas
- Municipal fund securities are NOT the same as municipal bonds. They are pooled investment programs, not debt instruments. The word "municipal" in the name is misleading.
MSRB Rule D-12
- The Municipal Securities Rulemaking Board (MSRB) regulates municipal fund securities under MSRB Rule D-12
- Rule D-12 specifically defines "municipal fund security" to include three product types:
| Product | Purpose | Available To |
|---|---|---|
| 529 Plans | Education savings | Individual investors |
| ABLE Accounts | Disability expense savings | Eligible individuals with disabilities |
| Local Government Investment Pools (LGIPs) | Short-term cash management | Government entities only |
- Broker-dealers and municipal securities dealers must be registered with the MSRB to sell these products
- The MSRB writes rules governing the sale and marketing of municipal fund securities, but only has authority over adviser-sold (not direct-sold) programs
Exam Tip: Gotchas
- All three product types (529s, ABLE accounts, LGIPs) fall under MSRB Rule D-12. If the exam asks which rule governs these products, the answer is always D-12.
Key Regulatory Points
- MSRB sets the rules, but FINRA and the SEC enforce them
- Municipal fund securities are exempt from SEC registration (government securities exemption), but the dealers who sell them are not exempt from MSRB rules
- Unlike mutual funds, these products are not registered investment companies under the Investment Company Act of 1940
Exam Tip: Gotchas
- The MSRB regulates the dealers, not the issuers. States and municipalities that create these programs are not subject to MSRB rules; only the broker-dealers who sell them are.
- Municipal fund securities are exempt from SEC registration, but the dealers who sell them still must follow MSRB rules. The exemption applies to the product, not the seller.