Municipal Fund Securities

Information for Investors

MSRB rules are designed, first and foremost, to protect investors and the public interest. They impose customer protection duties on broker-dealers who sell municipal fund securities, including 529 college savings plans and LGIPs. MSRB rules obligate broker-dealers to deal fairly with you, not to engage in any deceptive, dishonest or unfair practices, and to provide you with information vital to making your investment decision. These duties are further heightened if the broker-dealer has recommended that you enter into an investment or course of investments.

Some important considerations to keep in mind when investing are discussed below. For a more detailed discussion of the legal obligations imposed on broker-dealers, see Securities Regulation.

Know Yourself

Any prudent investment begins with you – the investor – considering, among other things, why you are investing, when invested funds might reasonably be needed, and to what extent you can afford the risk of investment losses or investment gains that are below expected levels. If you anticipate investing a certain amount of money, consider whether you are investing the right amount to achieve your ultimate purpose, and whether your remaining money will be sufficient to cover all your other needs. You also should consider the extent to which you can withstand different levels of investment risk, both as a financial and an emotional matter.

Know Your Investment

A prudent investment also requires an understanding of the investment you are making. You should ask yourself whether the investment is likely to produce the investment results you want. You should also ask yourself whether the risks of the investment are within your comfort zone.

Learn about 529 college savings plans – Read our primer on 529 college savings plans for a general background and to find other resources for understanding these plans.

Learn about local government investment pools – Read our primer on LGIPs for a general background and to find other resources for understanding these pools.

Understand the risks – Investments in municipal fund securities involve investment risks. Although these securities are issued by states or other governmental entities, they are not guaranteed against investment loss, except in certain very limited cases. As with any investment in a mutual fund or other equity security, an investment in a municipal fund security can decrease in value. Furthermore, although the past performance of a security may be one of several appropriate factors to consider in choosing an investment, such past performance is not necessarily indicative of how the investment will perform in the future.

Disclosure to Customers

If you make an investment through a broker-dealer, the broker-dealer must provide you with information material to your transaction at or prior to your placing an order. This disclosure often will be provided by supplying you with a copy of the issuer’s program description, disclosure document or information statement (referred to under MSRB and SEC rules as an “official statement”). The official statement must be delivered to you by no later than the settlement of your investment (generally, when you take ownership and have paid for the investment). The broker-dealer also must provide you with a confirmation of your transaction, either on a transaction-by-transaction basis or through a periodic statement. This confirmation or periodic statement includes basic information about your transaction.

Learn about your investments – You should read the official statement carefully and should never hesitate to ask your broker-dealer to answer any questions you have or to clarify any information you do not fully understand. You should not feel constrained to wait for your broker-dealer to deliver the required disclosure information to you. If you want more time to review the official statement, you should let your broker-dealer know. In addition, most issuers make their official statements and much more information available for free on the Internet.

Suitability of Recommended Transactions

In many cases, a broker-dealer may recommend to you a particular investment or course of investments. In making such a recommendation, the broker-dealer must have reasonable grounds for believing that the recommendation is suitable. The broker-dealer must make this “suitability determination” based on the information available about you and the security you are purchasing. You should note that a broker-dealer is obligated to make a suitability determination only if it has made a recommendation. Thus, if you have already made a determination on your own regarding a particular investment, the broker-dealer generally will not be obligated to make a suitability determination.

Think about your reasons for investing – Consider when you will need the money you are investing, how much you are depending upon that money to grow over time, and the extent to which your objectives may be affected if your investment loses money or grows at a slower rate than expected. Make sure you know enough about your investment to understand whether it is likely to deliver the investment results you are seeking. You should work with your broker-dealer to ensure that your investment is suitable – and if you are making an investment decision on your own without the guidance of a broker-dealer, you need to be doubly sure that you make your own “suitability determination. ”

Broker-Dealer Commissions

If you make a purchase through a broker-dealer that charges a commission, that commission must be disclosed to you. The confirmation or periodic statement that you receive from your broker-dealer must disclose any transaction-based commissions charged by the broker-dealer. In addition, most official statements include information about commissions and other charges that may apply. Information about any fees paid by the issuer to the broker-dealer also will be included either in the official statement, on your confirmation or periodic statement, or in an annual statement delivered by your broker-dealer. Finally, you have a right to know about any other transaction-based fees your broker-dealer receives from a third party as a result of your investment. Broker-dealers are prohibited from charging a commission that is in excess of a fair and reasonable amount.

Know what you are paying to invest – Understand how much of the money you are paying to the broker-dealer is going to work for you in your investment and how much is a cost of making the investment. Don’t hesitate to ask your broker-dealer if alternate commission scales (such as front-end, back-end, asset-based or even no-load) are offered for your particular investment and if volume discounts are available. Investors in 529 college savings plans should understand that, in some states, purchases may be made directly from the issuer at no or reduced commission in certain circumstances.

 

Municipal Fund Securities: Introduction, Product Information, Qualification Requirements, Securities Regulation, Information for Investors, Links to Other Resources