You must understand municipal fund securities well to score high in the Securities Industry Essentials exam. This study guide page covers municipal fund securities such as local government investment pools, 529 plans, and ABLE accounts to ensure you’re well-prepared for the SIE exam.
The Municipal Securities Rulemaking Board (MSRB) regulates the municipal securities market, establishing rules for brokers, dealers, and advisors to ensure market integrity and protect investors through transparency, fairness, and efficiency.
All the municipal advisory firms involved in municipal securities business or services must be registered with the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB).
The representatives of municipal advisor firms must be qualified for the Series 52 exam organized by the Financial Industry Regulatory Authority (FINRA).
Like other broker-dealers, municipal securities broker-dealers must comply with SEC and MSRB regulations. These include rules on fair dealing, ensuring suitability, providing necessary disclosures, accurate pricing, and proper supervision, among other requirements.
529 College Savings Plans
529 College Savings Plans are tax-advantaged investment vehicles designed to help families save for future education costs. These plans have become famous for funding higher education due to their flexibility, tax benefits, and growth potential.
Section 529 of the Small Business Job Protection Act of 1996 offers tax advantages for contributions made toward higher education. The SEC treats it as a municipal securities fund because it’s created and sponsored by the state governments.
529 college savings plans can be advisor-sold or direct-sold, and the account holder can change their investments twice a year.
- Advisor-Sold Plans: These plans are sold through financial advisors or brokers. The professionals provide personalized investment advice and help clients select and manage their 529 Plan investments. However, the commission and charges are typically higher than in direct-sold plans.
- Direct-Sold Plans: These plans are sold directly by the state or plan sponsor without the involvement of financial advisors. These plans are designed for individuals who prefer to manage their investments independently. Direct-sold plans typically have lower fees and expenses since no advisor commissions or intermediary costs exist.
Achieving a Better Life Experience (ABLE) Accounts
Achieving a Better Life Experience (ABLE) Accounts are tax-advantaged savings accounts designed to help individuals with disabilities save for qualified disability expenses without affecting their eligibility for public benefits. These accounts offer financial security and flexibility, empowering individuals with disabilities to achieve a better quality of life.
The ABLE Act was signed into law on December 19, 2014, as part of the Tax Increase Prevention Act 2014. The legislation was a significant step forward in providing financial support and independence for individuals with disabilities. ABLE Accounts are modeled after 529 College Savings Plans and are governed by Section 529A of the Internal Revenue Code.
- Tax Advantages: Contributions to an ABLE Account grow tax-deferred, and withdrawals for qualified disability expenses are tax-free, offering significant tax savings.
- Eligibility for Public Benefits: ABLE Accounts allow individuals with disabilities to save without jeopardizing their eligibility for means-tested benefits such as Supplemental Security Income (SSI) and Medicaid.
- Qualified Disability Expenses: Funds in an ABLE Account can be used for a wide range of qualified disability expenses, including education, housing, transportation, employment training, healthcare, assistive technology, and basic living expenses. This flexibility ensures that the funds can be used to enhance the beneficiary’s quality of life in various aspects.
- Contribution Limits: The annual contribution limit for ABLE Accounts is tied to the federal gift tax exclusion amount, which is $16,000 per year (as of 2024). However, working beneficiaries can contribute an additional amount equal to their gross income, up to the federal poverty level for a one-person household. Lifetime contribution limits are set by individual states and typically align with the limits for 529 College Savings Plans, often exceeding $300,000.
- Control and Management: The beneficiary or an authorized individual, such as a parent or legal guardian, can manage the ABLE Account. This control allows for tailored financial management based on the beneficiary’s needs and circumstances. Investment options within ABLE Accounts vary by state, offering choices between conservative, moderate, and aggressive investment strategies.
- Portability: ABLE Accounts can be transferred from one state’s program to another without losing tax advantages. This flexibility allows beneficiaries to choose the program that best suits their needs. Withdrawals used for qualified disability expenses are tax-free, providing significant tax savings.
Note– The first $100,000 in an ABLE Account is excluded from the SSI resource limit. Balances above this amount may temporarily suspend SSI benefits, but Medicaid eligibility is unaffected regardless of the account balance.
Local Government Investment Pools (LGIPs)
Local Government Investment Pools (LGIPs) are investment vehicles established by state governments to pool the resources of various local governmental entities, such as cities, counties, and school districts.
These pooled funds are then invested in short-term securities to achieve liquidity and return on investment (ROI) objectives.
LGIPs are exempt from registration with the Securities and Exchange Commission (SEC), simplifying their regulatory requirements. This exemption allows LGIPs to operate under the oversight of state laws and regulations, ensuring a tailored approach to local needs.