WASHINGTON – Ohio filed the first offering document for a potential new type of municipal fund security based on tax-advantaged savings accounts that help support individuals with disabilities, the Municipal Securities Rulemaking Board announced Tuesday.
The document was filed on the MSRB's EMMA system. The accounts are created under state programs that were allowed after the passage of the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE). The accounts are meant to help individuals with disabilities maintain health, independence, and quality of life.
States, as well as their agencies and instrumentalities, can establish and maintain an ABLE program under the act.
"We are very happy to see that the first ABLE disclosure document was filed voluntarily by a state," said MSRB executive director Lynnette Kelly. "To promote a fair and transparent municipal securities market, we look forward to making all ABLE program [offering documents] widely available to the public on EMMA."
The Ohio legislature approved the state's ABLE program in June 2015. The state legislation authorizes the Ohio treasurer's office to establish and offer ABLE accounts nationwide. The creation of the ABLE accounts will allow individuals with disabilities to save up to $14,000 a year without losing their eligibility for certain public benefits programs, like Medicaid.
Individuals seeking to open an ABLE account through the Ohio program will have the choice of five investment options that range from higher risk to low risk. They will have the choice of investing all of their assets in one of the five categories or spreading their investments out among multiple levels, according to the filed documents.
The MSRB became involved with the ABLE accounts because they are similar to interests offered under 529 college savings plans, which the Securities and Exchange Commission has determined are municipal fund securities. The self-regulator sought interpretive guidance from the SEC as to whether the interests the ABLE programs would provide could also be considered municipal fund securities.
The SEC responded that "at least some interests in ABLE accounts … may be 'municipal securities' … depending on facts and circumstances." It also said it would "view those interests as having been sold in a 'primary offering'" as defined under SEC Rule 15c2-12. That means a dealer that engages in underwriting business related to an ABLE account could be acting as an underwriter in connection with a primary offering, and thus subject to the requirements of 15c2-12.
Given that guidance, the MSRB said that dealers it regulates would be required to comply with investor protection rules when acting as underwriters in connection with the ABLE accounts. For example, the dealer's recommendation to purchase interests in an ABLE account would have to be suitable for the purchaser based on the purchaser's financial situation and investment objective. The dealer would also have to provide a customer, no later than the settlement of the transaction, a copy of the offering documents, called disclosure booklets.
Dealers working with ABLE accounts probably would be engaged in the same way states hire them for 529 plans. States with 529 plans hire an investment management firm to manage the investment of the plan assets. The primary distributor, often a dealer affiliate of the firm, then underwrites and distributes units of the savings plan and also usually enters into an arrangement with other dealers that act as selling dealers in an effort to widen the distribution channels to investors, according to the MSRB.
As part of the MSRB's regulatory regime, the program disclosure booklets will be made available on EMMA both on a voluntary basis from states and on a required basis from the dealers involved in the primary offerings.
The MSRB has provided dealers that act as underwriters with respect to sales of ABLE accounts with interpretive guidance under its Rule D-12, which defines the term "municipal fund security." The rule tells those dealers that they may be subject to all MSRB rules, unless they are specifically exempted.
Dealers that act as underwriters for ABLE accounts must also follow all applicable interpretive guidance laid out under those MSRB rules that apply to interests in 529 college savings plans.
MSRB Rule G-45 requires underwriters for 529 plans to submit information semi-annually using the online Form G-45. The form asks for data like plan descriptive information, assets, contributions, withdrawals, and fee and cost structure. Dealers are also required to provide performance data submissions annually.
