For the most part, you cannot offer a security for sale or investment willy-nilly. California, like most states, has a set of laws and regulations in place to provide safeguards against fraud. Additionally, California has a substantial income tax, but state and local governments must also raise a great deal of revenue from bonds. The state of California and the U.S. tax code encourage the purchase of California municipal bonds by granting tax advantages.
California Investment Regulation
The primary enforcement agency for securities laws in California is the California Department of Securities Regulation. This department functions as part of the Division of Corporations, and oversees the registration and licensing of financial advisors, stockbrokers and related professionals. Financial professionals who misrepresent investments, or fail to account for investment suitability, can have their licenses revoked, be subject to substantial fines or disgorgements, and even face jail time, if the offense is egregious to the point of criminality.
California Blue Sky Laws
"Blue sky" laws are state laws that prohibit fraud in the sale of investments and securities, and frequently apply to locally-marketed investments and those which have not been registered with the Securities Exchange Commission, and therefore do not fall under federal jurisdiction. The term comes from the early part of the century, when state governments moved to reign in the claims of securities pitchmen, who regularly promised investors "the blue sky." Inevitably, investments failed to deliver on those promises. In California, blue sky laws fall primarily under Chapter 1-21 of the California Corporations Code
While most income from bond interest is taxable under federal and California law, the law makes an exception for bonds issued by the State of California and by the various county, city and municipal authorities throughout the state. Interest on these bonds is generally free of federal income tax, and also of California state income tax. These funds are popular among investors in higher tax brackets, who are more tax sensitive. An investment in a California municipal bond, for example, may generate a higher income after tax than a comparable bond issued by the U.S. government or corporate bond. Certain exceptions apply to those subject to the federal alternative minimum tax.
Choosing a California Advisor
Investment advisors and insurance agents in California must generally be registered with the California Department of Securities Regulation, or with the California Department of Insurance Regulation. Those who sell risky products, such as mutual funds, stocks, bonds or variable annuities, must generally also register with the Securities and Exchange Commission. Some exceptions apply to those who are Registered Investment Advisors, or who work for one. When selecting an advisor, check to ensure that the advisor's credentials are valid with the appropriate state agency.
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