Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Proposed Rule Change Consisting of Interpretive Guidance on Customer Protection Obligations of Brokers, Dealers and Municipal Securities Dealers Relating to the Marketing of 529 College Savings Plans, 25867-25875 [E6-6555]
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Federal Register / Vol. 71, No. 84 / Tuesday, May 2, 2006 / Notices
Dated: April 20, 2006.
Nancy M. Morris,
Secretary.
[FR Doc. E6–6554 Filed 5–1–06; 8:45 am]
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. The MSRB has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53715; File No. SR–MSRB–
2006–03]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of Proposed
Rule Change Consisting of Interpretive
Guidance on Customer Protection
Obligations of Brokers, Dealers and
Municipal Securities Dealers Relating
to the Marketing of 529 College
Savings Plans
April 25, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 31,
2006, the Municipal Securities
Rulemaking Board (‘‘MSRB’’ or
‘‘Board’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
substantially prepared by the MSRB.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The MSRB is filing with the
Commission a proposed rule change
consisting of interpretive guidance on
customer protection obligations of
brokers, dealers and municipal
securities dealers (‘‘dealers’’) relating to
the marketing of 529 college savings
plans. The MSRB proposes an effective
date for the proposed rule change of 60
calendar days after Commission
approval. The text of the proposed rule
change is available on the MSRB’s Web
site (https://www.msrb.org), at the
MSRB’s principal office, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
MSRB included statements concerning
the purpose of and basis for the
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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15:18 May 01, 2006
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
In a May 14, 2002 notice (the ‘‘2002
Notice’’), the MSRB interpreted Rule G–
17, on fair dealing, to require dealers
selling out-of-state 529 college savings
plan interests to customers to disclose at
or prior to the sale to the customer (the
‘‘time of trade’’) that, depending upon
the laws of the customer’s home state,
favorable state tax treatment for
investing in a 529 college savings plan
may be limited to investments made in
a 529 college savings plan offered by the
customer’s home state.3 In addition, the
MSRB provided guidance in the 2002
Notice on the application of Rule G–19,
on suitability of recommendations and
transactions, and other customer
protection rules in the context of 529
college savings plan transactions.
The proposed rule change broadens
the existing time-of-trade disclosure
obligation with respect to the marketing
of out-of-state 529 college savings plans.
Under the proposed rule change, dealers
selling out-of-state 529 college savings
plan interests are required to disclose to
the customer, at or prior to the time of
trade, that: (i) Depending on the laws of
the home state of the customer or
designated beneficiary, favorable state
tax treatment or other benefits offered
by such home state may be available
only if the customer invests in the home
state’s 529 college savings plan; (ii)
state-based benefits should be one of
many appropriately weighted factors to
be considered in making an investment
decision; and (iii) the customer should
consult with his or her financial, tax or
other adviser about how such statebased benefits would apply to the
customer’s specific circumstances and
may wish to contact his or her home
state or any other 529 college savings
plan to learn more about their features.
Guidance is provided as to the manner
of delivering this revised out-of-state
disclosure to ensure that such
information is noted by the customer,
and dealers are reminded that all
3 See Rule G–21 Interpretation—Application of
Fair Practice and Advertising Rules to Municipal
Fund Securities, May 14, 2002, reprinted in MSRB
Rule Book.
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disclosures made to customers,
regardless of whether they are made
pursuant to a regulatory mandate, must
not be false or misleading.
The proposed rule change further
reminds dealers that providing
disclosures to customers does not
relieve them of their suitability duties—
including their obligation to consider
the customer’s financial status, tax
status and investment objectives—
arising in connection with
recommended transactions. The
proposed rule change describes certain
basic suitability principles applicable to
recommended transactions in 529
college savings plans, advising dealers
to consider whether a recommendation
is consistent with the customer’s tax
status and any federal or state taxrelated investment objectives of the
customer. The proposed rule change
emphasizes that any dealer that
recommends a transaction must
undertake an active suitability process
involving a meaningful analysis that
takes into consideration information
about the customer and the security.
Dealers are further advised that
suitability determinations should be
based on the various appropriately
weighted factors that are relevant in any
particular set of facts and
circumstances. Finally, the proposed
rule change reaffirms existing guidance
from the 2002 Notice on other customer
protection obligations applicable to
dealer sales practices in the 529 college
savings plan market.
2. Statutory Basis
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2)(C) of the Act,4 which provides
that the MSRB’s rules shall:
be designed to prevent fraudulent and
manipulative acts and practices, to promote
just and equitable principles of trade, to
foster cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with respect
to, and facilitating transactions in municipal
securities, to remove impediments to and
perfect the mechanism of a free and open
market in municipal securities, and, in
general, to protect investors and the public
interest.
The MSRB believes that the proposed
rule change is consistent with the Act
because it will further investor
protection by strengthening and
clarifying dealers’ customer protection
obligations relating to the marketing of
529 college savings plans, including but
not limited to the duty to provide
important disclosures to customers
investing in out-of-state 529 college
4 15
U.S.C. 78o–4(b)(2)(C).
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Federal Register / Vol. 71, No. 84 / Tuesday, May 2, 2006 / Notices
savings plans and to undertake active
suitability analyses for recommended
transactions based on appropriately
weighted factors.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The MSRB does not believe that the
proposed rule change will result in any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act since it would apply
equally to all dealers.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
On June 10, 2004, the MSRB
published for comment draft
interpretive guidance relating to, among
other things, the disclosure obligations
of dealers selling out-of-state 529 college
savings plans, strengthening the out-ofstate disclosures originally mandated in
the 2002 Notice (the ‘‘2004 Proposal’’).5
The MSRB received comments on the
2004 Proposal from eight
commentators.6 After reviewing these
comments, considering the concerns of
5 See MSRB Notice 2004–16 (June 10, 2004). The
2004 Proposal, together with a related proposal
(MSRB Notice 2004–17 (June 15, 2004)),
represented a comprehensive initiative of the MSRB
to strengthen a broad range of customer protection
obligations set out in the 2002 Notice. Portions of
the 2004 Proposal significantly strengthening 529
college savings plan advertising requirements have
been adopted, with certain additional requirements
and modifications, by the MSRB and approved by
the Commission. See Exchange Act Release No.
51736 (May 24, 2005), 70 FR 31551 (June 1, 2005).
See also Exchange Act Release No. 52289 (August
18, 2005), 70 FR 49699 (August 24, 2005). In
addition, the strengthened customer protection
obligations with respect to 529 college savings plan
sales incentives proposed in the related June 15,
2004 proposal have been adopted by the MSRB and
approved by the Commission. See Exchange Act
Release No. 52555 (October 3, 2005), 70 FR 59106
(October 11, 2005). The current proposed rule
change represents the final stage of the MSRB’s
2004 customer protection initiative.
6 Letters from: Kenneth B. Roberts, Hawkins
Delafield & Wood LLP (‘‘Hawkins’’), to Ernesto A.
Lanza, Senior Associate General Counsel, MSRB,
dated August 20, 2004; Mary L. Schapiro, Vice
Chairman, NASD, and President, Regulatory Policy
and Oversight, to Mr. Lanza, dated September 9,
2004; Tamara K. Salmon, Senior Associate Counsel,
Investment Company Institute (‘‘ICI’’), to Mr. Lanza,
dated September 10, 2004; David J. Pearlman,
Chairman, College Savings Foundation (‘‘CSF’’), to
Mr. Lanza, dated September 13, 2004; Elizabeth L.
Bordowitz, General Counsel, Finance Authority of
Maine (‘‘FAME’’), to Mr. Lanza, dated September
13, 2004; Diana F. Cantor, Chair, College Savings
Plan Network (‘‘CSPN’’), and Executive Director,
Virginia College Savings Plan, to Mr. Lanza, dated
September 15, 2004; Elizabeth Varley and Michael
D. Udoff, Co-Staff Advisers, Securities Industry
Association (‘‘SIA’’) Ad Hoc 529 Plans Committee,
to Mr. Lanza, dated September 15, 2004; and Raquel
Alexander, PhD, Assistant Professor, and LeAnn
Luna, PhD, Assistant Professor, University of North
Carolina at Wilmington (‘‘UNCW’’), to Mr. Lanza,
dated September 15, 2004.
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NASD and others regarding high levels
of out-of-state sales and consulting with
Commission staff, the MSRB published
on May 19, 2005 a notice seeking further
comment on a revised version of the
draft interpretive guidance (the ‘‘2005
Proposal’’).7 The 2005 Proposal
included a discussion of existing
resources and challenges in connection
with obtaining disclosure information in
the 529 college savings plan
marketplace and sought comment on the
possible substantial expansion of the
disclosure and suitability obligations
described in the 2002 Notice. The MSRB
received comments on the 2005
Proposal from 22 commentators.8
The 2004 and 2005 Proposals, as well
as the comments received on these
proposals, are discussed below. The
7 See
MSRB Notice 2005–28 (May 19, 2005).
from: Ms. Alexander, Assistant Professor
of Accounting, University of Kansas, and Ms. Luna,
Assistant Professor of Accounting, University of
Tennessee (‘‘Alexander & Luna’’), to Mr. Lanza,
dated July 26, 2005; Judith A. Wilson, Compliance
Attorney, 1st Global Capital Corp. (‘‘1st Global’’), to
Mr. Lanza, dated July 28, 2005; Diana Scott, Senior
Vice President & General Manager, John Hancock
Financial Services (‘‘Hancock’’), to Mr. Lanza, dated
July 28, 2005; John C. Heywood, Principal,
Vanguard Group, Inc. (‘‘Vanguard’’), to Mr. Lanza,
dated July 28, 2005; Mr. Pearlman, CSF, to Mr.
Lanza, dated July 29, 2005 and February 13, 2006;
Tim Berry, Chair, CSPN, and Indiana State
Treasurer, to Mr. Lanza, dated July 29, 2005; Ms.
Salmon, ICI, to Mr. Lanza, dated July 29, 2005;
Jacqueline T. Williams, Executive Director, Ohio
Tuition Trust Authority (‘‘Ohio TTA’’), to Mr. Lanza
and Ghassan Hitti, Assistant General Counsel,
MSRB, dated July 29, 2005; Ira D. Hammerman,
Senior Vice President & General Counsel, SIA, to
Mr. Lanza, dated July 29, 2005; Ms. Cantor,
Executive Director, Virginia College Savings Plan
(‘‘Virginia CSP’’), to Mr. Lanza, dated July 29, 2005;
John D. Perdue, Chairman, Board of Trustees of the
West Virginia College Prepaid Tuition and Savings
Program, and State Treasurer (‘‘West Virginia’’), to
Mr. Lanza, dated July 29, 2005; James F. Lynch,
Associate Vice President for Finance, University of
Alaska (‘‘University of Alaska’’), to Mr. Lanza, dated
July 29, 2005; Eileen M. Smiley, Vice President &
Assistant Secretary, USAA Investment Management
Company (‘‘USAA’’), to Mr. Lanza, dated July 29,
2005; Ronald C. Long, Senior Vice President,
Wachovia Securities, LLC (‘‘Wachovia’’), to Mr.
Lanza, dated July 29, 2005; Michael L. Fitzgerald,
State Treasurer of Iowa (‘‘Iowa’’), to Mr. Lanza,
received August 1, 2005; Henry H. Hopkins, Vice
President, Director & Chief Legal Counsel, T. Rowe
Price Investment Services, Inc. (‘‘T. Rowe’’), to Mr.
Lanza, dated August 1, 2005; Thomas M. Yacovino,
Vice President, A.G. Edwards and Sons, Inc., (‘‘AG
Edwards’’), to Mr. Lanza, dated August 3, 2005; W.
Daniel Ebersole, Director, Georgia Office of
Treasury and Fiscal Services (‘‘Georgia’’), to Mr.
Lanza, dated August 4, 2005; Nancy K. Kopp,
Treasurer, State of Maryland, and Chair, College
Savings Plans of Maryland (‘‘CSP-Maryland’’), to
Mr. Lanza, dated August 10, 2005; Mr. Pearlman,
Senior Vice President and Deputy General Counsel,
Fidelity Investments (‘‘Fidelity’’), to Mr. Lanza,
dated December 7, 2005; James W. Pasman, Senior
Vice President & Managing Director, PFPC Inc.
(‘‘PFPC’’), to Mr. Lanza, dated December 12, 2005;
and Randall Edwards, President, National
Association of State Treasurers (‘‘NAST’’), and
Oregon State Treasurer, to Amelia A.J. Bond, Chair,
MSRB, dated March 20, 2006.
8 Letters
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MSRB has considered these comments,
together with important developments
in the mechanisms for ensuring the free
and effective flow of information to the
public about all 529 college savings
plans offered in the marketplace
(discussed below), in determining to file
this proposed rule change.
General. The 2004 Proposal proposed
expanding the existing obligation of
dealers under the 2002 Notice to advise
their out-of-state 529 college savings
plan customers of the potential loss of
in-state benefits. The 2004 Proposal did
not address issues relating to suitability.
All commentators on the 2004 Proposal
supported the importance of ensuring
some degree of disclosure to customers
of the existence of potential in-state
benefits of 529 college savings plans but
some commentators suggested changes
to the specific proposal.
The 2005 Proposal covered a wider
range of topics than the portion of the
2004 Proposal relating to disclosure.
The 2005 Proposal sought to expand the
time-of-trade disclosure obligation for
out-of-state sales proposed in the 2004
Proposal to include a requirement that
dealers identify for their out-of-state
customers the specific tax and other
benefits that each of their respective
home states offer and that such
customers would forego by investing in
an out-of-state 529 college savings plan
(the ‘‘special home state disclosure
proposal’’). More broadly, the 2005
Proposal discussed general disclosure
practices and mechanisms in the 529
college savings plan market, including
the possible establishment of
centralized information sources. Dealers
were reminded that disclosures made to
customers do not relieve dealers of their
suitability duties—including their
obligation to consider the customer’s
financial status, tax status and
investment objectives—arising in
connection with recommended
transactions. The 2005 Proposal
discussed existing suitability standards
as applied to recommendations of 529
college savings plan transactions and
proposed expanding such standards to
require dealers recommending out-ofstate 529 college savings plan
investments to undertake a comparative
suitability analysis involving a
comparison of the recommended out-ofstate 529 college savings plan with the
customer’s home state 529 college
savings plan (the ‘‘comparative
suitability proposal’’). Finally, the 2005
Proposal discussed other sales practice
obligations under the MSRB’s fair
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practice rule.9 Although some
commentators supported the concept of
centralized information sources for the
529 college savings plan market and the
clarification of certain elements of
existing basic disclosure and suitability
obligations, the vast majority of
commentators opposed any
requirements to disclose specific instate features foregone as a result of an
out-of-state investment or to undertake
a comparative suitability analysis.
The MSRB has determined to
strengthen the existing time-of-trade
disclosure and basic suitability
obligations as applied to transactions in
529 college savings plans. However, in
view of significant developments
toward the maturation of the disclosure
dissemination system for this market
and with due regard to concerns
expressed by the commentators and in
press reports regarding the potentially
substantial impact of the special home
state disclosure and comparative
suitability proposals, the MSRB has
determined at this time not to adopt
these two proposals pending further
assessment of the efficacy of
developments in the disclosure
infrastructure.
Disclosure. General Time-of-Trade
Disclosure Obligation and Established
Industry Sources
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Summary. The 2005 Proposal
described dealers’ obligations to make
time-of-trade disclosures of all material
facts about a 529 college savings plan
investment they are selling to their
customers that are known to the dealer
or that are reasonably accessible from
established industry sources.10 The
2005 Proposal included a discussion of
established industry sources for 529
college savings plan information 11 and
requested comments on whether one or
9 These provisions did not generate comments
and have been included in the proposed rule
change with only minimal modifications.
10 Established industry sources include the
system of nationally recognized municipal
securities information repositories, the MSRB’s
Municipal Securities Information Library system
and Real-Time Transaction Reporting System,
rating agency reports and other sources of
information relating to the municipal securities
transaction generally used by dealers that effect
transactions in the type of municipal securities at
issue. See Rule G–17 Interpretation—Interpretive
Notice Regarding Rule G–17, on Disclosure of
Material Facts, March 20, 2002, published in MSRB
Rule Book.
11 The MSRB noted that many of the traditional
established industry sources are designed
specifically for debt securities, not 529 college
savings plans, and that it viewed established
industry sources for 529 college savings plans as
encompassing a broad variety of information
sources that professionals in this market can and do
use to obtain material information about these
investments and the state programs.
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more centralized Web-based sources of
information should be established by
the private sector, industry associations
or the MSRB. The 2005 Proposal noted
that such a resource would ideally
provide on-site summary information
formatted to allow dealers and
customers to make meaningful
comparisons of the material features of
529 college savings plans, together with
direct links to all 529 college savings
plan official statements (typically
referred to as ‘‘program disclosure
documents’’) and related information.
The types of material features
summarized on such a site might
include (among other things) state tax
treatment, other state-based benefits,
costs associated with investments and
performance information. The 2005
Proposal suggested that such a
centralized Web site could embed
within its posted summary information
direct hyperlinks to the portions of the
program disclosure document or other
529 college savings plan materials that
provide more detailed descriptions of
the summarized information.12 The
2004 Proposal did not address these
issues.
Comments. Two commentators on the
2005 Proposal supported the
establishment of a centralized Web site
for summary 529 college savings plan
information with links to 529 college
savings plan materials for more detailed
information.13 They stated that such a
Web site would allow dealers and
customers to make meaningful
comparisons of features and reduce the
complexity of gathering accurate,
complete and timely information.
Alexander & Luna listed what they
viewed as several weaknesses of current
third-party Web sites: (i) Information
that is frequently out-of-date,
incomplete or inaccurate; (ii)
comparison information that is not
universally available; (iii) information
that is ‘‘summarized at a very high
level;’’ (iv) Web site tools that are often
over-simplified, which can distort
results and ultimately provide incorrect
guidance; and (v) many current Web
sites that require users to pay for
subscriptions in order to obtain basic
information.
Many commentators opposed, or
questioned the feasibility of,
12 The 2005 Proposal noted that the centralized
Web site could, for example, provide hyperlinks to
Web sites, or other contact information for sources,
providing performance data current to the most
recent month-end, as required under Rule G–
21(e)(ii)(C) relating to 529 college savings plan
advertisements containing performance
information.
13 1st Global; Alexander & Luna.
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establishing a centralized Web site.14
Some commentators expressed concern
that disparate features of 529 college
savings plans make presentation of
parallel information nearly impossible
and that information presented in a
summary manner may omit material
information or portray such information
inaccurately.15 Some commentators
expressed concerns about potential
liabilities for dealers that might rely on
summarized information obtained from
any such centralized Web site.16
Hancock stated that existing Web sites
are adequate for the marketplace.
CSPN stated that the creation of an
MSRB-sponsored Web site would be
contrary to the municipal securities
exemption under federal securities laws
and that it is already working to address
529 college savings plan disclosure
concerns through its disclosure
principles and its own Web site. CSPN
noted that it had recently developed
Disclosure Principles Statement No. 2
(‘‘DP–2’’) which, ‘‘along with the
information available on the CSPN Web
site will be the most effective and
appropriate approach to enhancing
investor accessibility to pertinent 529
Plan information.’’ 17 CSPN stated that
DP–2 included ‘‘an expanded locator
concept, which will assist investors in
finding similar information in the
offering materials prepared by various
State issuers, while still using only the
materials authorized by that State
issuer.’’ 18
Although the 2004 Proposal did not
address broader disclosure issues in the
529 college savings plan market, two
commentators on the 2004 Proposal
made suggestions in this regard, stating
that the MSRB should put in place a
broader set of disclosure requirements
to accompany the proposed disclosures
described in the draft guidance.19 NASD
suggested that the MSRB require
standardized point-of-sale disclosure of
fees and compensation in a manner
similar to the point-of-sale disclosure
requirements included by the
Commission in its proposed Exchange
14 AG Edwards, CSF, CSPN (with the concurrence
of CSP-Maryland, Georgia, Iowa, Ohio TTA,
University of Alaska, Virginia CSP, West Virginia),
Hancock, and USAA.
15 CSF, CSPN, Hancock.
16 Hancock, Vanguard.
17 DP–2 updated CSPN’s Voluntary Disclosure
Principles Statement No. 1 (‘‘DP–1’’), which CSPN
published in 2004 to provide guidance to state
programs in preparing their program disclosure
documents. See also NAST.
18 CSP-Maryland, Georgia, Iowa, Ohio TTA,
University of Alaska, Virginia CSP and West
Virginia supported CSPN’s position.
19 NASD and UNCW.
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Act Rule 15c2–3.20 UNCW described an
academic study on factors influencing
investor choices of 529 college savings
plans and concluded that ‘‘investors
appear to be choosing high fee/broker
sold funds rather than the lower fee,
direct investment options * * * [and]
appear to be ignoring state tax benefits.’’
Stating that its study suggested that
investors may not have sufficient
information in these areas, UNCW
supported mandating disclosure of not
only state tax benefits but also uniform
disclosure of fees and performance for
each 529 college savings plan portfolio
and for each underlying fund in such
portfolio, as well as the percentage of
total investments that each underlying
fund represents with respect to such 529
college savings plan portfolio.
MSRB Response. Since publishing the
2005 Proposal, the MSRB has engaged
the 529 college savings plan industry
and other federal securities regulators in
a dialogue regarding the 2005 Proposal.
In particular, the MSRB has emphasized
that a crucial factor underlying the
special home state disclosure and
comparative suitability proposals for
out-of-state sales was the difficulty that
the average investor faces in obtaining
and understanding the key items of
information relevant in making an
informed investment decision in the
context of the varied and complex
national 529 college savings plan
marketplace.21
20 See Securities Act Release No. 8358 (January
29, 2004), 69 FR 6438 (February 10, 2004). See also
Securities Act Release No. 8544 (February 28,
2005), 70 FR 10521 (March 4, 2005). The proposed
rulemaking by the Commission would apply to
dealer sales of 529 college savings plan interests, in
addition to sales of mutual funds and variable
annuities. The MSRB observes that NASD has
provided comments to the Commission on this
proposal that are similar to those provided to the
MSRB. The MSRB also has provided comments to
the Commission in support of its point-of-sale
disclosure proposal (available at www.sec.gov/rules/
proposed/s70604/s70604–629.pdf). The MSRB has
taken NASD’s suggestions in this regard under
advisement pending final action by the Commission
on proposed Rule 15c2–3.
21 Investor confusion has often been reported to
result from the large number of states offering
valuable state tax or other benefits for investing instate and the fact that virtually every plan has
unique and sometimes complicated features not
included in most other plans. The difficulties that
investors face finding and understanding relevant
information (in spite of the existence of a handful
of Web-based resources on 529 college savings
plans), as well as some recent steps toward
improving the ability of investors to understand
their choices in the marketplace, have been detailed
by the press. See, e.g., Ross Kerber, ‘‘Complaints
Mounting over College Savings Accounts,’’ Boston
Globe, February 14, 2006, at www.boston.com/
business/personalfinance/articles/2006/02/14/
complaints_mounting_over_
college_savings_accounts; John Wasik, ‘‘How to
Find the Best 529 College Savings Programs,’’
Bloomberg.com, February 13, 2006, at https://
www.bloomberg.com/apps/news?pid=10000039&
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The MSRB has long been an advocate
for the best possible disclosure practices
by the 529 college savings plan
community, having previously noted
that investor protection concerns dictate
that disclosure in this market should be
based on six basic characteristics:
comprehensiveness, understandability,
comparability, universality, timeliness
and accessibility.22 However, the MSRB
has no authority to mandate that 529
college savings plans make specific
disclosures, including disclosure of
costs associated with investments in the
plans, descriptions of the state tax
consequences of investing in their plans
or in out-of-state plans, or disclosure of
performance under uniform standards.23
The MSRB is of the view that a more
comprehensive and user-friendly system
of established industry sources is
needed in the 529 college savings plan
market. Such a system would be based
on centralized Web sites providing
direct access to official issuer disclosure
materials for the entire universe of 529
college savings plan offerings, together
with understandable educational
information and tools allowing for sideby-side comparisons of different 529
college savings plans. It is crucial for
ensuring that dealers and other
investment professionals seeking to
provide advice to their customers on
their college savings options are able to
do so with a full view of the available
alternatives. In addition, this maturation
of the disclosure dissemination system
sid=aUh68emzUVEE&refer=columnist_wasik;
Albert B. Crenshaw, ‘‘529 College Savings Plans and
State of Confusion,’’ Washington Post, February 12,
2006, at F8; Aleksandra Todorova, ‘‘529 Plans Get
Report Card,’’ SmartMoney.com, February 10, 2006,
at www.smartmoney.com/consumer/
index.cfm?story=200602101; Jonathan Clements,
‘‘Choosing a 529 College-Savings Plan: When It
Makes Sense to Go Out of State,’’ Wall Street
Journal, January 4, 2006, at D1; Michelle Singletary,
‘‘Get the Straight Facts on Section 529,’’
Washington Post, December 1, 2005, at D2; Ashlea
Ebling, ‘‘College Savers Unite!’’ Forbes.com,
September 28, 2005, at www.forbes.com/
estateplanning/2005/09/27/beltway-college-savingscz_ae_0928beltway.html.
22 See Oversight Hearing on 529 College Savings
Plans, Hearing Before the Subcomm. on Financial
Management, The Budget, and International
Security of the Senate Comm. on Governmental
Affairs, 108th Cong. (Sept. 30, 2004) (testimony of
Ernesto A. Lanza, Senior Associate General
Counsel, MSRB).
23 When dealers market 529 college savings plans,
the MSRB requires time-of-trade disclosures of
material information to customers, including but
not limited to disclosure of the possible loss of state
tax benefits if investing out-of-state. Proposed
Exchange Act Rule 15c2–3, if adopted, would
mandate that point-of-sale fee disclosures be made
by dealers in a uniform manner. Furthermore, the
MSRB has adopted uniform requirements for the
calculation and presentation of up-to-date
performance data in 529 college savings plan
advertisements published by dealers that also
require that advertisements disclose the possible
loss of state tax benefits if investing out-of-state.
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for the 529 college savings plan market
would be particularly crucial to
allowing customers to have direct access
to the types of information and other
resources they need to make informed
investment decisions, thereby
promoting investor confidence in their
own abilities to make such informed
choices, whether with the advice of an
investment professional or as a selfdirected investor.
The MSRB understands that CSPN
has undertaken to upgrade its existing
Web site to provide a comprehensive
centralized Web-based utility for the
529 college savings plan market.24 This
CSPN utility is expected to provide a
combination of on-site and hyperlinked
resources, including summary
information formatted to allow
meaningful comparisons of many of the
material features of different 529 college
savings plans, together with direct links
to all 529 college savings plan program
disclosure documents and related
information as well as to other sources
providing tools designed for analyzing
potential 529 college savings plan
investments. The MSRB understands
that the types of material features to be
disclosed through this utility include,
but are not limited to, state tax
treatment and other state-based benefits,
costs associated with investments, types
of underlying investments, performance
information and other important
features that can vary considerably from
state to state, with hyperlinks embedded
within such summary information
providing direct links to a full
description of such specific feature in
the issuer’s official program disclosure
document or other reliable sources.
CSPN has also recently published its
DP–2, which updates its baseline
disclosure standards designed to assist
the states in improving the quality and
comparability of their 529 college
savings plan disclosures in the program
disclosure document. In the 2005
Proposal, the MSRB had urged CSPN
and the individual 529 college savings
plans to strive for the maximum
possible ease of access to, and
uniformity of content in, the program
disclosure documents consistent with
providing information that is complete,
understandable and not misleading. The
MSRB views the upcoming
implementation of the CSPN Web site
disclosure utility and the development
and universal adoption of DP–2 as
significant steps toward achieving the
goals the MSRB had set out for the 529
college savings plan market.
The CSPN utility will join other
commercial, industry group and
24 NAST.
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the investing public with easy access to,
and to affirmatively encourage the use
of, this market-wide information. The
MSRB will monitor the 529 college
savings plan market closely with respect
to the concerns it sought to address
through the 2005 Proposal. The MSRB
will be acutely sensitive to, and will
consider whether further rulemaking
would be appropriate in the event of,
any significant failures in the further
development of the disclosure
dissemination system or in the efficacy
of this dissemination system to address
the MSRB’s stated investor protection
concerns.
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regulator Web-based resources
providing useful information for
individuals seeking to save for college
expenses and for investment
professionals active in the 529 college
savings plan market. Several
commercial ventures already provide, in
summary and often tabular form, some
categories of information for all
available 529 college savings plans.
Such information can include fees and
expenses, minimum and maximum
investments, nature of the underlying
investments, distribution channels, and
state tax treatment, as well as
proprietary ratings based on varying
criteria. Much of this information is
available at no cost, with some sources
making available, for a fee, premium or
membership-based services for
professionals that provide greater detail
or more comprehensive analyses of the
available information. Many of these
commercial Web sites have taken recent
steps to augment and refine the
information they offer to the public, and
the MSRB understands that alternative
pricing structures suitable for retail
investors for access to these premium
services are being considered. In
addition, the MSRB, the Commission,
NASD and the North American
Securities Administrators Association
(‘‘NASAA’’) all provide general
information about investing in 529
college savings plans useful to
individual investors and market
participants.25 NASD plans to introduce
on its Web site in the near future an
improved expense analyzer for the 529
college savings plan market using a live
datafeed that should allow for more
reliable calculations and cost
comparisons among different 529
college savings plans. The CSPN utility
is expected to serve as a central hub
through which investors can easily
access many of these other Web-based
resources.
The MSRB believes that improved
disclosures can only be effective if
potential investors actually access such
disclosures with sufficient time to make
use of the information in coming to an
investment decision. The MSRB urges
dealers and other participants in the 529
college savings plan market to provide
Time-of-Trade Disclosure Obligation in
Connection With Out-of-State Sales.
Summary. Currently, a dealer’s timeof-trade disclosure obligation under
Rule G–17 requires the dealer, when
selling an out-of-state 529 college
savings plan interest to a customer, to
disclose that, depending upon the laws
of the customer’s home state, favorable
state tax treatment for investing in a 529
college savings plan may be limited to
investments made in a 529 college
savings plan offered by the customer’s
home state.26 The 2004 Proposal sought
to broaden this time-of-trade disclosure
obligation to include reference to other
potential benefits (such as scholarships
to in-state colleges, matching grants into
529 college savings plan accounts, or
reduced or waived program fees, among
other benefits), in addition to state tax
benefits, offered solely in connection
with in-state investments.27
The 2005 Proposal retained the
baseline time-of-trade disclosure
proposed in the 2004 Proposal, with a
modification to include reference to the
designated beneficiary’s home state in
addition to that of the customer. The
2005 Proposal also would add to the
baseline time-of-trade disclosure a
requirement that the dealer advise the
customer that any state-based benefits
offered with respect to a particular 529
college savings plan should be
considered as one of many
appropriately weighted factors that
should be considered by the customer in
making his or her investment decision.
The dealer also would be required to
25 The MSRB provides information for investors
in 529 college savings plans at www.msrb.org/
msrb1/mfs/ruleinfo.asp. The Commission also has
published an investor-oriented introduction to 529
college savings plans at www.sec.gov/investor/pubs/
intro529.htm. NASD has created a college savings
center for investors at https://apps.nasd.com/
investor_Information/Smart/529/000100.asp.
NASAA, an association of state securities
regulators, has published (in conjunction with
CSPN and ICI) a brochure on understanding college
savings plans, available at www.nasaa.org/
Investor_Education/3136.cfm.
26 The 2002 Notice also stated that such
disclosure, coupled with a suggestion that the
customer consult a tax adviser about any state tax
consequences of the investment, would provide
adequate notice of the potential loss of in-state tax
benefits.
27 The 2004 Proposal would require the dealer to
suggest that the customer consult with a qualified
adviser or contact his or her home state’s 529
college savings plan to learn more about any state
tax or other benefits that might be available in
conjunction with an investment in that state’s 529
college savings plan.
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suggest that the customer consult with
his or her financial, tax or other adviser
to learn more about how such home
state features (including any limitations)
may apply to the customer’s specific
circumstances, and that the customer
also may wish to contact his or her
home state or any other 529 college
savings plan to learn more about any
state-based benefits (and any limitations
thereto) that might be available in
conjunction with an investment in that
state’s 529 college savings plan.
In a significant expansion from the
2004 Proposal, the 2005 Proposal sought
to impose the special home state
disclosure proposal in addition to the
baseline time-of-trade disclosure
described above. Under this special
home state disclosure proposal, a dealer
would be required to inquire of any outof-state customer as to whether the
realization of state-based benefits was
an important factor in the customer’s
investment decision. If the customer
were to answer affirmatively, the dealer
would be required to disclose (i)
material information available from
established industry sources about statebased benefits offered by the home state
of the customer or designated
beneficiary for investing in its 529
college savings plan and (ii) whether
such state-based benefits are available in
the case of an investment in an out-ofstate 529 college savings plan.
Finally, the 2005 Proposal reminded
dealers that the time-of-trade disclosure
obligation with respect to sales of outof-state 529 college savings plan
interests is in addition to dealers’
existing general obligation under Rule
G–17 to disclose to their customers at
the time of trade all material facts
known by dealers about the 529 college
savings plan interests they are selling to
the customers, as well as material facts
about such 529 college savings plan that
are reasonably accessible to the market
through established industry sources.
Further, the 2005 Proposal reminded
dealers that disclosures made to
customers as required under MSRB
rules do not relieve dealers of their
suitability obligations—including the
obligation to consider the customer’s
financial status, tax status and
investment objectives—if they have
recommended investments in 529
college savings plans.
Comments. All commentators on the
2004 Proposal supported the importance
of ensuring disclosure to customers of
the potential existence of state-specific
features of 529 college savings plans,
with many providing suggested
modifications. CSF expressed concern
about the potential for over-emphasizing
state variations in a way that may
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detract from more fundamental
considerations in making an investment
decision. Two commentators stated that
not every difference in state treatment
ultimately will be a benefit to the
investor, particularly in view of
potential recapture of state tax benefits
or other restrictions that some states
impose under certain circumstances.28
These commentators suggested that the
best course would be to remind
investors to carefully review the
program disclosure documents of their
home state programs and to consult
their own advisors before investing,
with one commentator stating that it
would be inappropriate to suggest to
investors that they seek help from their
home state programs because it is
unclear whether the programs can
provide complete information regarding
such consequences and because some
states may seek to persuade investors to
make an investment in their program
rather than to impart disinterested
information.29 Two other commentators
stated that the proposed disclosure
should reflect that some benefits may be
dependent on the designated
beneficiary’s home state (rather than or
in addition to the home state of the
investor).30
Most commentators on the 2005
Proposal accepted the modified baseline
time-of-trade disclosure. However, most
commentators strongly opposed the
newly proposed special home state
disclosure proposal requiring disclosure
of specific in-state features that an outof-state investor may forego,31 with no
commentator expressing support for this
proposal. Several commentators argued
that the specific disclosures under the
special home state disclosure proposal
would inevitably result in state-based
benefits being given disproportionate
weight as compared to the many other
important factors to be considered in
making an investment decision.32 In
addition, commentators observed that,
without a reliable source of market-wide
information, dealers would be required
to undertake substantial effort (with
concomitant expenditure of resources)
to understand and track the details of
constantly changing state law treatment
of all 529 college savings plans.33 Two
28 CSF
and SIA.
However, Hawkins disagreed, stating that
with respect to non-tax state benefits, customers
should be directed to the specific state program for
more information.
30 CSPN and FAME.
31 AG Edwards, CSF, CSP-Maryland, CSPN,
Georgia, ICI, Iowa, Ohio TTA, SIA, T. Rowe,
University of Alaska, USAA, Vanguard, Virginia
CSP, Wachovia and West Virginia.
32 AG Edwards, CSF, ICI and Vanguard.
33 Hancock, ICI, SIA, T. Rowe, USAA, Vanguard
and Wachovia.
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29 CSF.
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commentators warned that requiring
dealers to make specific disclosures
about 529 college savings plans they do
not offer could result in potential
liability.34 SIA stated that the special
home state disclosure proposal would
have the counter-intuitive result of
compromising a dealer’s ability to
develop in-depth expertise regarding the
range of investment products it is
reasonably capable of servicing.
Wachovia expressed concern that this
requirement would have the potential to
paralyze investors with an
overabundance of information.
The University of Alaska stated that it
did not wish to have its program
features explained by dealers who are
not authorized to market its 529 college
savings plan, with other commentators
echoing the concern that dealers would
often be required to disclose
information about a security they do not
offer and about which they may not
have sufficient expertise.35 CSF
observed that the burden this
requirement would place on the 529
college savings plan market does not
exist for any other type of security. Two
commentators suggested that the MSRB
await final action by the Commission on
its point-of-sale disclosure proposal
before finalizing any significant changes
in 529 college savings plan disclosure
requirements.36
MSRB Response. The MSRB
continues to believe that it is important
that investors are informed that they
may be foregoing state tax and other
benefits offered by their home states by
investing in out-of-state 529 college
savings plans. At the same time, the
MSRB agrees that there is a potential for
over-emphasizing the importance of a
particular state’s beneficial state tax
treatment of an investment in its 529
college savings plan, such as where a
state offers a tax benefit that ultimately
is relatively small in value compared to
the financial impact that a marginally
higher expense figure may have or
under a variety of other circumstances.
As a result, the MSRB has adopted the
revised out-of-state disclosure
obligation, which retains the baseline
time-of-trade disclosure as modified in
the 2005 Proposal. The MSRB believes
that this time-of-trade disclosure in
connection with out-of-state sales of 529
college savings plans, as embodied in
the revised out-of-state disclosure
obligation, achieves the appropriate
balance between providing for the
disclosure to customers of material
information about the potential loss of
34 Hancock
and ICI.
and Vanguard.
36 USAA and Wachovia.
35 ICI
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state tax or other benefits relevant to
their investment decision in 529 college
savings plans without imposing a
significant burden on dealers and other
529 college savings plan market
participants that could possibly result in
an over-simplification of the complexity
of state law factors or an over-emphasis
of state law factors as compared to other
relevant investment factors. The MSRB
has also retained the reminders in the
2005 Proposal to the effect that these
disclosures do not obviate other
disclosure requirements or suitability
obligations arising as a result of a
recommendation.
The MSRB has determined not to
retain the proposal to expand the timeof-trade disclosure obligation to include
disclosures of specific state tax and
other state-based features of the
investor’s home state as set out in the
special home state disclosure proposal.
The MSRB has based this determination
in large measure on the potential
adverse impact of this proposal and the
significant steps currently in process
toward improvements in the 529 college
savings plan disclosure system.
Fulfilling the Revised Out-of-State
Disclosure Obligation Through the
Program Disclosure Document.
Summary. The 2004 Proposal would
have clarified that dealers could meet
their baseline time-of-trade disclosure
obligation with respect to potentially
foregone in-state benefits through the
issuer’s program disclosure document
so long as the program disclosure
document is provided to the customer at
or prior to the time of trade. The 2004
Proposal also would have strengthened
the minimum standards for prominence
in the program disclosure document in
order to meet the baseline time-of-trade
disclosure obligation. Thus, to meet this
obligation through the program
disclosure document, the disclosure
must appear in a manner that is
reasonably likely to be noted by an
investor. A presentation of this
disclosure in the program disclosure
document in close proximity and with
equal prominence to the first
presentation of information regarding
other federal or state tax-related
consequences of investing in the 529
college savings plan, and in close
proximity and with equal prominence to
each other presentation of information
regarding state tax-related consequences
of investing in the 529 college savings
plan, would be deemed to satisfy this
requirement. The 2005 Proposal
modified this presentation standard to
provide for equal prominence with the
principal (rather than first) presentation
of substantive information regarding
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other federal or state tax-related
consequences of investing in the 529
plan, and the inclusion of a reference to
this disclosure (rather than restating
such disclosure in full) in close
proximity and with equal prominence to
each other presentation of information
regarding state tax-related consequences
of investing in the 529 plan. Neither
proposal required that such disclosure
be made through the program disclosure
document, noting that the MSRB does
not have the authority to mandate the
inclusion of any particular item of
information in the issuer’s disclosure
document. Both proposals provided that
dealers would be required to separately
make such disclosure if the program
disclosure document did not include
the information in the manner
prescribed.
Comments. Two commentators
expressed concern that the 2004
Proposal would effectively establish
requirements for what information must
be included in the program disclosure
document.37 They noted that the MSRB
does not have authority to directly
impose such requirements. CSF stated
that the MSRB should not establish
specific requirements for how such
disclosure should appear in the program
disclosure document, while two other
commentators suggested limiting some
of the presentation requirements
described in the 2004 Proposal.38 SIA
stated that the requirement that the
information appearing in the program
disclosure document must appear in a
manner ‘‘reasonably likely to be noted
by an investor’’ would place dealers in
the position to question the judgment of
the state issuers and suggested that there
should be a presumption that the
placement and adequacy of the
disclosure in the program disclosure
document is reasonable.
CSPN also expressed concern with
respect to the reformulation of this
language in the 2005 Proposal, stating
that dealers would have to determine
whether the issuer has satisfactorily
made such disclosures, potentially
calling into question the issuer’s
determination to include or omit
particular information.39 CSPN stated
that this would create a constant
second-guessing aspect as to the validity
of offering materials created and
distributed by state issuers. SIA stated
that this provision would likely lead
dealers to create their own disclosure
37 CSPN and FAME. These commentators, as well
as Hawkins, noted that CSPN’s DP–1 already
contained language on this topic.
38 Hawkins and ICI.
39 CSP-Maryland, Georgia, Iowa, Ohio TTA,
University of Alaska, Virginia CSP and West
Virginia supported CSPN’s position.
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documents for use in marketing 529
college savings plans, conflicting with
most distribution agreements and
program disclosure documents.
MSRB Response. The MSRB reaffirms
its view that it has no authority to
mandate the inclusion of any particular
items in the issuer’s program disclosure
document. As noted in both the 2004
and 2005 Proposals, disclosure through
the program disclosure document in the
manner described by the MSRB is not
the sole manner in which a dealer may
fulfill the revised out-of-state disclosure
obligation. Just as a dealer could meet
this disclosure obligation through a
separate communication, it stands to
reason that a disclosure made through
the program disclosure document in a
manner that is reasonably likely to be
noted by an investor could also be used
by a dealer to fulfill this duty. Thus, the
MSRB has provided in the proposed
rule change that, if the issuer has not
included the information in the program
disclosure document in the manner
described, inclusion in the program
disclosure document in another manner
may nonetheless fulfill the dealer’s outof-state disclosure obligation so long as
disclosure in such other manner is
reasonably likely to be noted by an
investor.40
General Suitability Obligations
Summary. The 2005 Proposal
reaffirmed the guidance originally
provided in the 2002 Notice regarding
general suitability standards under Rule
G–19 for recommended transactions in
529 college savings plans. The 2005
Proposal added reminders to dealers to
the effect that their suitability obligation
requires a meaningful analysis that
40 Some commentators stated that certain portions
of the 2005 Proposal might not be consistent with
the notion that the issuer’s program disclosure
document serves as ‘‘the fundamental, stand-alone
disclosure’’ for the offering of its securities. See,
e.g., AG Edwards. The MSRB believes that dealers
generally may view the issuer’s program disclosure
document as the definitive source from which to
obtain information about the securities they are
selling to their customers. The requirement that a
dealer make the revised out-of-state disclosure
separately if such disclosure is not included in the
program disclosure document in a manner
reasonably likely to be noted by an investor is not
intended to imply otherwise, consistent with prior
Commission guidance regarding the obligations of
underwriters and other dealers in connection with
municipal issuers’ disclosure materials under the
federal securities laws. See Exchange Act Release
No. 26100 (September 22, 1988), 53 FR 37778
(Section III—Municipal Underwriter
Responsibilities), as modified by Exchange Act
Release No. 26985 (June 28, 1989), 54 FR 28799
(Section III—Interpretation of Underwriter
Responsibilities), and as reaffirmed by Exchange
Act Release No. 33741 (March 9, 1994), 59 FR
12748 (Section V—Interpretive Guidance with
Respect to Obligations of Municipal Securities
Dealers).
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establishes the reasonable grounds for
believing that the recommendation is
suitable and that they must have and
enforce written supervisory procedures
reasonably designed to ensure
compliance with this obligation for
every recommended transaction. The
2004 Proposal did not address
suitability issues.
Comments. No commentator opposed
the 2005 Proposal’s discussion of
general suitability standards.
MSRB Response. The MSRB has
retained this discussion of general
suitability standards.
Comparative Suitability Obligation for
Out-of-State Sales
Summary. The 2005 Proposal would
require a dealer to undertake a
comparative suitability analysis if the
dealer has recommended an out-of-state
529 college savings plan transaction to
a customer who has indicated that one
of his or her investment objectives is
realization of state-based benefits, as
contemplated under the special home
state disclosure proposal. This would
involve the consideration of the statebased benefits available from the
customer’s home state 529 college
savings plan in a comparative analysis
with the out-of-state 529 college savings
plan being offered. Any such state-based
benefits offered with respect to a
particular 529 college savings plan
would be considered as one of many
appropriately weighted factors that have
an ultimate bearing on the relative
strengths of a particular investment, and
the existence of state-based benefits
would not create a presumption that
investment in the home state 529
college savings plan is necessarily
superior to an out-of-state 529 college
savings plan. If a dealer were to
conclude that an investment in the
home state 529 college savings plan
would be superior to an investment in
the offered out-of-state 529 college
savings plan under every reasonable
scenario, then the dealer would be
obligated to inform the customer of this
determination and would be permitted
to effect a transaction in the offered outof-state 529 college savings plan only if
the customer has directed to do so after
this suitability determination has been
disclosed and if the out-of-state 529
college savings plan would, without
regard to the comparative analysis with
the home state 529 college savings plan,
be suitable for the customer under
traditional suitability standards. The
2004 Proposal did not contain
comparable language.
Comments. Most commentators
strongly opposed the comparative
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suitability proposal,41 although two
commentators conceded that, depending
on the facts and circumstances, the
availability of in-state benefits may be
one of many appropriate factors to
consider in making a suitability
determination under traditional
suitability standards.42 Three
commentators stated that there has been
no evidence of abuse in the offering of
out-of-state 529 college savings plans to
justify these new requirements,
observing that no enforcement actions
have been taken.43 Several
commentators observed that federal
securities regulation has never been
premised on the concept that a dealer is
obligated to determine the most suitable
investment of a particular type for any
customer and that the comparative
suitability proposal is inconsistent with
the application of the suitability rule to
every other product sold by dealers.44
Two commentators stated that
comparisons are highly disfavored by
NASD rules.45 The University of Alaska
noted that one result of a more stringent
suitability obligation for
recommendations of 529 college savings
plan transactions might be that dealers
would place their clients in other
investment vehicles that do not carry
such regulatory risk.
Many commentators viewed the
comparative suitability proposal as
effectively requiring dealers to become
fully familiar with the terms of all 529
college savings plans before offering any
particular 529 college savings plan.46
These commentators argued that this
extraordinary burden is unprecedented
41 AG Edwards, CSF, CSP-Maryland, CSPN,
Fidelity, Georgia, Hancock, ICI, Iowa, NAST, Ohio
TTA, PFPC, SIA, T. Rowe, University of Alaska,
USAA, Virginia CSP, Wachovia and West Virginia.
No commentator expressed support for the
comparative suitability proposal.
42 AG Edwards and Hancock.
43 CSF, ICI and USAA. NASD subsequently
announced on October 26, 2005 that it had reached
a settlement agreement with Ameriprise Financial
Services, Inc., in connection with the failure of the
firm to establish and maintain supervisory systems
and procedures reasonably designed to achieve
compliance with suitability obligations relating to
recommended transactions in 529 college savings
plans. See www.nasd.com/web/idcplg?IdcService=
SS_GET_PAGE&ssDocName=NASDW_015319. This
settlement agreement appears to have been the basis
for concern expressed by Fidelity and PFPC that
NASD may be incorporating the comparative
suitability proposal into its enforcement posture
prior to its final approval. The MSRB understands
that NASD did not intend certain language included
in the settlement agreement to imply that the
comparative suitability proposal is currently in
effect.
44 CSF, Fidelity, Hancock, PFPC, SIA, University
of Alaska and USAA.
45 CSF and SIA.
46 CSPN (with the concurrence of CSP-Maryland,
Georgia, Iowa, Ohio TTA, University of Alaska,
Virginia CSP, West Virginia), Hancock, ICI, T. Rowe
Price and Wachovia.
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and is likely to significantly discourage
the marketing of 529 college savings
plans. NAST agreed, emphasizing that
the comparative suitability proposal
would have substantially increased the
burden on the states themselves.
Wachovia suggested that the MSRB
undertake a cost-benefit analysis before
adopting the comparative suitability
proposal, while USAA stated that the
incremental costs associated with
meeting this standard would cause firms
to reevaluate whether offering 529
college savings plans continues to make
sense or to pass the incremental costs on
to investors. AG Edwards argued that it
is untenable to require a dealer to
inform a client that one 529 college
savings plan is unequivocally superior
to another. Two other commentators
stated that they are receiving anecdotal
evidence that some selling dealers are
withdrawing from the 529 college
savings plan market in response to this
proposal and to recent NASD
enforcement activity.47 CSF noted that
one potential result may be that some
customers who are accustomed to
relying on their financial advisors and
who otherwise might invest in suitable
529 college savings plans may
ultimately never make such an
investment.
SIA expressed concern that the
comparison contemplated by the
proposal would be difficult to
implement from a practical standpoint.
ICI agreed, identifying a number of
specific practical concerns. Some
commentators stated that the
comparative suitability proposal would
place inordinate focus on state benefits
while effectively ignoring the many
other reasons why an investor might
choose to invest in an out-of-state 529
college savings plan.48 Other
commentators predicted that the
potential liabilities that would arise
under the comparative suitability
proposal would result in many dealers
limiting their sales solely to the in-state
529 college savings plan, regardless of
its advantage or disadvantage.49 CSF
requested that the MSRB defer action on
the comparative suitability proposal
pending implementation of the planned
CSPN Web site enhancement.
MSRB Response. The MSRB has
determined not to retain the
comparative suitability proposal, based
in large measure on the potential
adverse impact of this proposal and the
significant steps currently in process
toward dramatic improvements in the
529 college savings plan disclosure
system. However, the MSRB agrees with
those commentators that noted that the
availability of in-state benefits may be
one of many appropriate factors to
consider in making a suitability
determination under traditional
suitability standards, depending on all
the facts and circumstances. Thus, the
MSRB has added guidance to this effect
in the proposed rule change, in
conjunction with additional guidance to
the effect that dealers should consider
whether a recommendation is consistent
with the customer’s tax status and any
customer investment objectives
materially related to federal or state tax
consequences of an investment.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The MSRB proposes an effective date
for the proposed rule change of 60
calendar days after Commission
approval. Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
A. By order approve such proposed
rule change, or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
47 Fidelity
and PFPC. Concerns regarding the
negative impact of the comparative suitability
proposal have also been detailed in press reports.
See Charles Paikert, ‘‘MSRB to Decide on
Controversial 529 Proposals,’’ Investment News,
February 13, 2006, at 2; Terry Savage, ‘‘Political
Issues Put the Hurt on College Savings,’’ The Street,
February 10, 2006, at www.thestreet.com/funds/
investing/10267688.html; Jilian Mincer, ‘‘Sales of
529 College Savings Plans Fell in ’05 Amid
Scrutiny,’’ Wall Street Journal, February 9, 2006, at
D2; Jilian Mincer, ‘‘Disclosure Proposals for 529s
Risk a Broker Backlash,’’ Wall Street Journal,
January 3, 2006, at D2; Lauren Barack, ‘‘Will Reform
Drive Brokers From 529 Sales?’’ Registered Rep,
November 1, 2005, at www.registeredrep.com/mag/
finance_reform_drive_brokers.
48 ICI, Hancock and Wachovia.
PO 00000
Frm 00064
Fmt 4703
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Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
49 AG
E:\FR\FM\02MYN1.SGM
Edwards, Fidelity and PFPC.
02MYN1
Federal Register / Vol. 71, No. 84 / Tuesday, May 2, 2006 / Notices
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–MSRB–2006–03 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MSRB–2006–03. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the MSRB’s offices. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–MSRB–
2006–03 and should be submitted on or
before May 23, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.50
Nancy M. Morris,
Secretary.
[FR Doc. E6–6555 Filed 5–1–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53720; File No. SR–NASD–
2006–051]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Expand the Maximum
Single Order Share Amount in
Nasdaq’s INET Facility
April 25, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 19,
2006, the National Association of
Securities Dealers, Inc.(‘‘NASD’’),
through its subsidiary, the Nasdaq Stock
Market, Inc. (‘‘Nasdaq’’), submitted to
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by Nasdaq. Nasdaq filed
the proposed rule change pursuant to
Section 19(b)(3)(A) of the Act 3 which
renders it effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Nasdaq proposes to expand the single
order maximum share amount in its
INET Facility to 999,999 shares. Nasdaq
will implement the proposed rule
change immediately. The text of the
proposed rule change is below.
Proposed new language is in italics;
deletions are in [brackets].4
4953. Order Entry Parameters
(a) INET System Orders
(1)–(3) No Change.
(4) Any order in whole shares up to
999,999 shares may be entered into the
System for normal execution processing.
*
*
*
*
*
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 Changes are marked to the rule text that appears
in the electronic NASD Manual found at https://
www.nasd.com. Prior to the date when The
NASDAQ Stock Market LLC (‘‘NASDAQ LLC’’)
commences operations, NASDAQ LLC will file a
conforming change to the rules of NASDAQ LLC
approved in Securities Exchange Act Release No.
53128 (January 13, 2006).
rmajette on PROD1PC67 with NOTICES
2 17
50 17
CFR 200.30–3(a)(12).
VerDate Aug<31>2005
15:18 May 01, 2006
Jkt 208001
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
25875
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
Nasdaq included statements concerning
the purpose of, and basis for, the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. Nasdaq has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Nasdaq’s INET Facility currently
operates using a 200,000 share
maximum single order limit for orders
sent to the New York Stock Exchange’s
DOT system. For all other orders, INET
applies a 999,999 share single order
maximum share amount. Nasdaq
proposes to codify for its INET Facility
a maximum single order share amount
standard, for all orders, of 999,999
shares, the same share number
maximum already in place in the
Nasdaq Market Center.5 The proposed
rule change will ensure that the INET
system provides an adequate and
uniform capability to accept large-size
orders as well as reduce technological
complexity for Nasdaq and users of its
systems by enhancing the degree of
uniformity among single order share
maximums across its systems.6
2. Statutory Basis
Nasdaq believes that the proposed
rule change is consistent with Section
15A of the Act,7 in general, and furthers
the objectives of Section 15A(b)(6) of the
Act,8 in particular, in that it is designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, remove
impediments to a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Nasdaq does not believe that the
proposed rule change will result in any
burden on competition that is not
5 See
NASD Rule 4706(d)(1).
single order maximum share number limit
for Nasdaq’s Brut Facility shall remain 1,000,099
shares. See NASD Rule 4903(f).
7 15 U.S.C. 78o–3.
8 15 U.S.C. 78o–3(6).
6 The
E:\FR\FM\02MYN1.SGM
02MYN1
]]>Agencies
[Federal Register Volume 71, Number 84 (Tuesday, May 2, 2006)]
[Notices]
[Pages 25867-25875]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-6555]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53715; File No. SR-MSRB-2006-03]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change Consisting of
Interpretive Guidance on Customer Protection Obligations of Brokers,
Dealers and Municipal Securities Dealers Relating to the Marketing of
529 College Savings Plans
April 25, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 31, 2006, the Municipal Securities Rulemaking Board (``MSRB''
or ``Board'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by the MSRB. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB is filing with the Commission a proposed rule change
consisting of interpretive guidance on customer protection obligations
of brokers, dealers and municipal securities dealers (``dealers'')
relating to the marketing of 529 college savings plans. The MSRB
proposes an effective date for the proposed rule change of 60 calendar
days after Commission approval. The text of the proposed rule change is
available on the MSRB's Web site (https://www.msrb.org), at the MSRB's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The MSRB has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In a May 14, 2002 notice (the ``2002 Notice''), the MSRB
interpreted Rule G-17, on fair dealing, to require dealers selling out-
of-state 529 college savings plan interests to customers to disclose at
or prior to the sale to the customer (the ``time of trade'') that,
depending upon the laws of the customer's home state, favorable state
tax treatment for investing in a 529 college savings plan may be
limited to investments made in a 529 college savings plan offered by
the customer's home state.\3\ In addition, the MSRB provided guidance
in the 2002 Notice on the application of Rule G-19, on suitability of
recommendations and transactions, and other customer protection rules
in the context of 529 college savings plan transactions.
---------------------------------------------------------------------------
\3\ See Rule G-21 Interpretation--Application of Fair Practice
and Advertising Rules to Municipal Fund Securities, May 14, 2002,
reprinted in MSRB Rule Book.
---------------------------------------------------------------------------
The proposed rule change broadens the existing time-of-trade
disclosure obligation with respect to the marketing of out-of-state 529
college savings plans. Under the proposed rule change, dealers selling
out-of-state 529 college savings plan interests are required to
disclose to the customer, at or prior to the time of trade, that: (i)
Depending on the laws of the home state of the customer or designated
beneficiary, favorable state tax treatment or other benefits offered by
such home state may be available only if the customer invests in the
home state's 529 college savings plan; (ii) state-based benefits should
be one of many appropriately weighted factors to be considered in
making an investment decision; and (iii) the customer should consult
with his or her financial, tax or other adviser about how such state-
based benefits would apply to the customer's specific circumstances and
may wish to contact his or her home state or any other 529 college
savings plan to learn more about their features. Guidance is provided
as to the manner of delivering this revised out-of-state disclosure to
ensure that such information is noted by the customer, and dealers are
reminded that all disclosures made to customers, regardless of whether
they are made pursuant to a regulatory mandate, must not be false or
misleading.
The proposed rule change further reminds dealers that providing
disclosures to customers does not relieve them of their suitability
duties--including their obligation to consider the customer's financial
status, tax status and investment objectives--arising in connection
with recommended transactions. The proposed rule change describes
certain basic suitability principles applicable to recommended
transactions in 529 college savings plans, advising dealers to consider
whether a recommendation is consistent with the customer's tax status
and any federal or state tax-related investment objectives of the
customer. The proposed rule change emphasizes that any dealer that
recommends a transaction must undertake an active suitability process
involving a meaningful analysis that takes into consideration
information about the customer and the security. Dealers are further
advised that suitability determinations should be based on the various
appropriately weighted factors that are relevant in any particular set
of facts and circumstances. Finally, the proposed rule change reaffirms
existing guidance from the 2002 Notice on other customer protection
obligations applicable to dealer sales practices in the 529 college
savings plan market.
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act,\4\ which provides that the MSRB's
rules shall:
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78o-4(b)(2)(C).
be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to, and facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market
in municipal securities, and, in general, to protect investors and
---------------------------------------------------------------------------
the public interest.
The MSRB believes that the proposed rule change is consistent with the
Act because it will further investor protection by strengthening and
clarifying dealers' customer protection obligations relating to the
marketing of 529 college savings plans, including but not limited to
the duty to provide important disclosures to customers investing in
out-of-state 529 college
[[Page 25868]]
savings plans and to undertake active suitability analyses for
recommended transactions based on appropriately weighted factors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change will result
in any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act since it would apply equally to
all dealers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
On June 10, 2004, the MSRB published for comment draft interpretive
guidance relating to, among other things, the disclosure obligations of
dealers selling out-of-state 529 college savings plans, strengthening
the out-of-state disclosures originally mandated in the 2002 Notice
(the ``2004 Proposal'').\5\ The MSRB received comments on the 2004
Proposal from eight commentators.\6\ After reviewing these comments,
considering the concerns of NASD and others regarding high levels of
out-of-state sales and consulting with Commission staff, the MSRB
published on May 19, 2005 a notice seeking further comment on a revised
version of the draft interpretive guidance (the ``2005 Proposal'').\7\
The 2005 Proposal included a discussion of existing resources and
challenges in connection with obtaining disclosure information in the
529 college savings plan marketplace and sought comment on the possible
substantial expansion of the disclosure and suitability obligations
described in the 2002 Notice. The MSRB received comments on the 2005
Proposal from 22 commentators.\8\
---------------------------------------------------------------------------
\5\ See MSRB Notice 2004-16 (June 10, 2004). The 2004 Proposal,
together with a related proposal (MSRB Notice 2004-17 (June 15,
2004)), represented a comprehensive initiative of the MSRB to
strengthen a broad range of customer protection obligations set out
in the 2002 Notice. Portions of the 2004 Proposal significantly
strengthening 529 college savings plan advertising requirements have
been adopted, with certain additional requirements and
modifications, by the MSRB and approved by the Commission. See
Exchange Act Release No. 51736 (May 24, 2005), 70 FR 31551 (June 1,
2005). See also Exchange Act Release No. 52289 (August 18, 2005), 70
FR 49699 (August 24, 2005). In addition, the strengthened customer
protection obligations with respect to 529 college savings plan
sales incentives proposed in the related June 15, 2004 proposal have
been adopted by the MSRB and approved by the Commission. See
Exchange Act Release No. 52555 (October 3, 2005), 70 FR 59106
(October 11, 2005). The current proposed rule change represents the
final stage of the MSRB's 2004 customer protection initiative.
\6\ Letters from: Kenneth B. Roberts, Hawkins Delafield & Wood
LLP (``Hawkins''), to Ernesto A. Lanza, Senior Associate General
Counsel, MSRB, dated August 20, 2004; Mary L. Schapiro, Vice
Chairman, NASD, and President, Regulatory Policy and Oversight, to
Mr. Lanza, dated September 9, 2004; Tamara K. Salmon, Senior
Associate Counsel, Investment Company Institute (``ICI''), to Mr.
Lanza, dated September 10, 2004; David J. Pearlman, Chairman,
College Savings Foundation (``CSF''), to Mr. Lanza, dated September
13, 2004; Elizabeth L. Bordowitz, General Counsel, Finance Authority
of Maine (``FAME''), to Mr. Lanza, dated September 13, 2004; Diana
F. Cantor, Chair, College Savings Plan Network (``CSPN''), and
Executive Director, Virginia College Savings Plan, to Mr. Lanza,
dated September 15, 2004; Elizabeth Varley and Michael D. Udoff, Co-
Staff Advisers, Securities Industry Association (``SIA'') Ad Hoc 529
Plans Committee, to Mr. Lanza, dated September 15, 2004; and Raquel
Alexander, PhD, Assistant Professor, and LeAnn Luna, PhD, Assistant
Professor, University of North Carolina at Wilmington (``UNCW''), to
Mr. Lanza, dated September 15, 2004.
\7\ See MSRB Notice 2005-28 (May 19, 2005).
\8\ Letters from: Ms. Alexander, Assistant Professor of
Accounting, University of Kansas, and Ms. Luna, Assistant Professor
of Accounting, University of Tennessee (``Alexander & Luna''), to
Mr. Lanza, dated July 26, 2005; Judith A. Wilson, Compliance
Attorney, 1st Global Capital Corp. (``1st Global''), to Mr. Lanza,
dated July 28, 2005; Diana Scott, Senior Vice President & General
Manager, John Hancock Financial Services (``Hancock''), to Mr.
Lanza, dated July 28, 2005; John C. Heywood, Principal, Vanguard
Group, Inc. (``Vanguard''), to Mr. Lanza, dated July 28, 2005; Mr.
Pearlman, CSF, to Mr. Lanza, dated July 29, 2005 and February 13,
2006; Tim Berry, Chair, CSPN, and Indiana State Treasurer, to Mr.
Lanza, dated July 29, 2005; Ms. Salmon, ICI, to Mr. Lanza, dated
July 29, 2005; Jacqueline T. Williams, Executive Director, Ohio
Tuition Trust Authority (``Ohio TTA''), to Mr. Lanza and Ghassan
Hitti, Assistant General Counsel, MSRB, dated July 29, 2005; Ira D.
Hammerman, Senior Vice President & General Counsel, SIA, to Mr.
Lanza, dated July 29, 2005; Ms. Cantor, Executive Director, Virginia
College Savings Plan (``Virginia CSP''), to Mr. Lanza, dated July
29, 2005; John D. Perdue, Chairman, Board of Trustees of the West
Virginia College Prepaid Tuition and Savings Program, and State
Treasurer (``West Virginia''), to Mr. Lanza, dated July 29, 2005;
James F. Lynch, Associate Vice President for Finance, University of
Alaska (``University of Alaska''), to Mr. Lanza, dated July 29,
2005; Eileen M. Smiley, Vice President & Assistant Secretary, USAA
Investment Management Company (``USAA''), to Mr. Lanza, dated July
29, 2005; Ronald C. Long, Senior Vice President, Wachovia
Securities, LLC (``Wachovia''), to Mr. Lanza, dated July 29, 2005;
Michael L. Fitzgerald, State Treasurer of Iowa (``Iowa''), to Mr.
Lanza, received August 1, 2005; Henry H. Hopkins, Vice President,
Director & Chief Legal Counsel, T. Rowe Price Investment Services,
Inc. (``T. Rowe''), to Mr. Lanza, dated August 1, 2005; Thomas M.
Yacovino, Vice President, A.G. Edwards and Sons, Inc., (``AG
Edwards''), to Mr. Lanza, dated August 3, 2005; W. Daniel Ebersole,
Director, Georgia Office of Treasury and Fiscal Services
(``Georgia''), to Mr. Lanza, dated August 4, 2005; Nancy K. Kopp,
Treasurer, State of Maryland, and Chair, College Savings Plans of
Maryland (``CSP-Maryland''), to Mr. Lanza, dated August 10, 2005;
Mr. Pearlman, Senior Vice President and Deputy General Counsel,
Fidelity Investments (``Fidelity''), to Mr. Lanza, dated December 7,
2005; James W. Pasman, Senior Vice President & Managing Director,
PFPC Inc. (``PFPC''), to Mr. Lanza, dated December 12, 2005; and
Randall Edwards, President, National Association of State Treasurers
(``NAST''), and Oregon State Treasurer, to Amelia A.J. Bond, Chair,
MSRB, dated March 20, 2006.
---------------------------------------------------------------------------
The 2004 and 2005 Proposals, as well as the comments received on
these proposals, are discussed below. The MSRB has considered these
comments, together with important developments in the mechanisms for
ensuring the free and effective flow of information to the public about
all 529 college savings plans offered in the marketplace (discussed
below), in determining to file this proposed rule change.
General. The 2004 Proposal proposed expanding the existing
obligation of dealers under the 2002 Notice to advise their out-of-
state 529 college savings plan customers of the potential loss of in-
state benefits. The 2004 Proposal did not address issues relating to
suitability. All commentators on the 2004 Proposal supported the
importance of ensuring some degree of disclosure to customers of the
existence of potential in-state benefits of 529 college savings plans
but some commentators suggested changes to the specific proposal.
The 2005 Proposal covered a wider range of topics than the portion
of the 2004 Proposal relating to disclosure. The 2005 Proposal sought
to expand the time-of-trade disclosure obligation for out-of-state
sales proposed in the 2004 Proposal to include a requirement that
dealers identify for their out-of-state customers the specific tax and
other benefits that each of their respective home states offer and that
such customers would forego by investing in an out-of-state 529 college
savings plan (the ``special home state disclosure proposal''). More
broadly, the 2005 Proposal discussed general disclosure practices and
mechanisms in the 529 college savings plan market, including the
possible establishment of centralized information sources. Dealers were
reminded that disclosures made to customers do not relieve dealers of
their suitability duties--including their obligation to consider the
customer's financial status, tax status and investment objectives--
arising in connection with recommended transactions. The 2005 Proposal
discussed existing suitability standards as applied to recommendations
of 529 college savings plan transactions and proposed expanding such
standards to require dealers recommending out-of-state 529 college
savings plan investments to undertake a comparative suitability
analysis involving a comparison of the recommended out-of-state 529
college savings plan with the customer's home state 529 college savings
plan (the ``comparative suitability proposal''). Finally, the 2005
Proposal discussed other sales practice obligations under the MSRB's
fair
[[Page 25869]]
practice rule.\9\ Although some commentators supported the concept of
centralized information sources for the 529 college savings plan market
and the clarification of certain elements of existing basic disclosure
and suitability obligations, the vast majority of commentators opposed
any requirements to disclose specific in-state features foregone as a
result of an out-of-state investment or to undertake a comparative
suitability analysis.
---------------------------------------------------------------------------
\9\ These provisions did not generate comments and have been
included in the proposed rule change with only minimal
modifications.
---------------------------------------------------------------------------
The MSRB has determined to strengthen the existing time-of-trade
disclosure and basic suitability obligations as applied to transactions
in 529 college savings plans. However, in view of significant
developments toward the maturation of the disclosure dissemination
system for this market and with due regard to concerns expressed by the
commentators and in press reports regarding the potentially substantial
impact of the special home state disclosure and comparative suitability
proposals, the MSRB has determined at this time not to adopt these two
proposals pending further assessment of the efficacy of developments in
the disclosure infrastructure.
Disclosure. General Time-of-Trade Disclosure Obligation and Established
Industry Sources
Summary. The 2005 Proposal described dealers' obligations to make
time-of-trade disclosures of all material facts about a 529 college
savings plan investment they are selling to their customers that are
known to the dealer or that are reasonably accessible from established
industry sources.\10\ The 2005 Proposal included a discussion of
established industry sources for 529 college savings plan information
\11\ and requested comments on whether one or more centralized Web-
based sources of information should be established by the private
sector, industry associations or the MSRB. The 2005 Proposal noted that
such a resource would ideally provide on-site summary information
formatted to allow dealers and customers to make meaningful comparisons
of the material features of 529 college savings plans, together with
direct links to all 529 college savings plan official statements
(typically referred to as ``program disclosure documents'') and related
information. The types of material features summarized on such a site
might include (among other things) state tax treatment, other state-
based benefits, costs associated with investments and performance
information. The 2005 Proposal suggested that such a centralized Web
site could embed within its posted summary information direct
hyperlinks to the portions of the program disclosure document or other
529 college savings plan materials that provide more detailed
descriptions of the summarized information.\12\ The 2004 Proposal did
not address these issues.
---------------------------------------------------------------------------
\10\ Established industry sources include the system of
nationally recognized municipal securities information repositories,
the MSRB's Municipal Securities Information Library[supreg] system
and Real-Time Transaction Reporting System, rating agency reports
and other sources of information relating to the municipal
securities transaction generally used by dealers that effect
transactions in the type of municipal securities at issue. See Rule
G-17 Interpretation--Interpretive Notice Regarding Rule G-17, on
Disclosure of Material Facts, March 20, 2002, published in MSRB Rule
Book.
\11\ The MSRB noted that many of the traditional established
industry sources are designed specifically for debt securities, not
529 college savings plans, and that it viewed established industry
sources for 529 college savings plans as encompassing a broad
variety of information sources that professionals in this market can
and do use to obtain material information about these investments
and the state programs.
\12\ The 2005 Proposal noted that the centralized Web site
could, for example, provide hyperlinks to Web sites, or other
contact information for sources, providing performance data current
to the most recent month-end, as required under Rule G-21(e)(ii)(C)
relating to 529 college savings plan advertisements containing
performance information.
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Comments. Two commentators on the 2005 Proposal supported the
establishment of a centralized Web site for summary 529 college savings
plan information with links to 529 college savings plan materials for
more detailed information.\13\ They stated that such a Web site would
allow dealers and customers to make meaningful comparisons of features
and reduce the complexity of gathering accurate, complete and timely
information. Alexander & Luna listed what they viewed as several
weaknesses of current third-party Web sites: (i) Information that is
frequently out-of-date, incomplete or inaccurate; (ii) comparison
information that is not universally available; (iii) information that
is ``summarized at a very high level;'' (iv) Web site tools that are
often over-simplified, which can distort results and ultimately provide
incorrect guidance; and (v) many current Web sites that require users
to pay for subscriptions in order to obtain basic information.
---------------------------------------------------------------------------
\13\ 1st Global; Alexander & Luna.
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Many commentators opposed, or questioned the feasibility of,
establishing a centralized Web site.\14\ Some commentators expressed
concern that disparate features of 529 college savings plans make
presentation of parallel information nearly impossible and that
information presented in a summary manner may omit material information
or portray such information inaccurately.\15\ Some commentators
expressed concerns about potential liabilities for dealers that might
rely on summarized information obtained from any such centralized Web
site.\16\ Hancock stated that existing Web sites are adequate for the
marketplace.
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\14\ AG Edwards, CSF, CSPN (with the concurrence of CSP-
Maryland, Georgia, Iowa, Ohio TTA, University of Alaska, Virginia
CSP, West Virginia), Hancock, and USAA.
\15\ CSF, CSPN, Hancock.
\16\ Hancock, Vanguard.
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CSPN stated that the creation of an MSRB-sponsored Web site would
be contrary to the municipal securities exemption under federal
securities laws and that it is already working to address 529 college
savings plan disclosure concerns through its disclosure principles and
its own Web site. CSPN noted that it had recently developed Disclosure
Principles Statement No. 2 (``DP-2'') which, ``along with the
information available on the CSPN Web site will be the most effective
and appropriate approach to enhancing investor accessibility to
pertinent 529 Plan information.'' \17\ CSPN stated that DP-2 included
``an expanded locator concept, which will assist investors in finding
similar information in the offering materials prepared by various State
issuers, while still using only the materials authorized by that State
issuer.'' \18\
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\17\ DP-2 updated CSPN's Voluntary Disclosure Principles
Statement No. 1 (``DP-1''), which CSPN published in 2004 to provide
guidance to state programs in preparing their program disclosure
documents. See also NAST.
\18\ CSP-Maryland, Georgia, Iowa, Ohio TTA, University of
Alaska, Virginia CSP and West Virginia supported CSPN's position.
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Although the 2004 Proposal did not address broader disclosure
issues in the 529 college savings plan market, two commentators on the
2004 Proposal made suggestions in this regard, stating that the MSRB
should put in place a broader set of disclosure requirements to
accompany the proposed disclosures described in the draft guidance.\19\
NASD suggested that the MSRB require standardized point-of-sale
disclosure of fees and compensation in a manner similar to the point-
of-sale disclosure requirements included by the Commission in its
proposed Exchange
[[Page 25870]]
Act Rule 15c2-3.\20\ UNCW described an academic study on factors
influencing investor choices of 529 college savings plans and concluded
that ``investors appear to be choosing high fee/broker sold funds
rather than the lower fee, direct investment options * * * [and] appear
to be ignoring state tax benefits.'' Stating that its study suggested
that investors may not have sufficient information in these areas, UNCW
supported mandating disclosure of not only state tax benefits but also
uniform disclosure of fees and performance for each 529 college savings
plan portfolio and for each underlying fund in such portfolio, as well
as the percentage of total investments that each underlying fund
represents with respect to such 529 college savings plan portfolio.
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\19\ NASD and UNCW.
\20\ See Securities Act Release No. 8358 (January 29, 2004), 69
FR 6438 (February 10, 2004). See also Securities Act Release No.
8544 (February 28, 2005), 70 FR 10521 (March 4, 2005). The proposed
rulemaking by the Commission would apply to dealer sales of 529
college savings plan interests, in addition to sales of mutual funds
and variable annuities. The MSRB observes that NASD has provided
comments to the Commission on this proposal that are similar to
those provided to the MSRB. The MSRB also has provided comments to
the Commission in support of its point-of-sale disclosure proposal
(available at www.sec.gov/rules/proposed/s70604/s70604-629.pdf).
The MSRB has taken NASD's suggestions in this regard under
advisement pending final action by the Commission on proposed Rule
15c2-3.
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MSRB Response. Since publishing the 2005 Proposal, the MSRB has
engaged the 529 college savings plan industry and other federal
securities regulators in a dialogue regarding the 2005 Proposal. In
particular, the MSRB has emphasized that a crucial factor underlying
the special home state disclosure and comparative suitability proposals
for out-of-state sales was the difficulty that the average investor
faces in obtaining and understanding the key items of information
relevant in making an informed investment decision in the context of
the varied and complex national 529 college savings plan
marketplace.\21\
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\21\ Investor confusion has often been reported to result from
the large number of states offering valuable state tax or other
benefits for investing in-state and the fact that virtually every
plan has unique and sometimes complicated features not included in
most other plans. The difficulties that investors face finding and
understanding relevant information (in spite of the existence of a
handful of Web-based resources on 529 college savings plans), as
well as some recent steps toward improving the ability of investors
to understand their choices in the marketplace, have been detailed
by the press. See, e.g., Ross Kerber, ``Complaints Mounting over
College Savings Accounts,'' Boston Globe, February 14, 2006, at
www.boston.com/business/personalfinance/articles/2006/02/14/
complaints_mounting_over_college_savings_accounts; John
Wasik, ``How to Find the Best 529 College Savings Programs,''
Bloomberg.com, February 13, 2006, at https://www.bloomberg.com/apps/
news?pid=10000039&sid=aUh68emzUVEE&refer=columnist_wasik; Albert
B. Crenshaw, ``529 College Savings Plans and State of Confusion,''
Washington Post, February 12, 2006, at F8; Aleksandra Todorova,
``529 Plans Get Report Card,'' SmartMoney.com, February 10, 2006, at
www.smartmoney.com/consumer/index.cfm?story=200602101; Jonathan
Clements, ``Choosing a 529 College-Savings Plan: When It Makes Sense
to Go Out of State,'' Wall Street Journal, January 4, 2006, at D1;
Michelle Singletary, ``Get the Straight Facts on Section 529,''
Washington Post, December 1, 2005, at D2; Ashlea Ebling, ``College
Savers Unite!'' Forbes.com, September 28, 2005, at www.forbes.com/
estateplanning/2005/09/27/beltway-college-savings-cz_ae_
0928beltway.html.
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The MSRB has long been an advocate for the best possible disclosure
practices by the 529 college savings plan community, having previously
noted that investor protection concerns dictate that disclosure in this
market should be based on six basic characteristics: comprehensiveness,
understandability, comparability, universality, timeliness and
accessibility.\22\ However, the MSRB has no authority to mandate that
529 college savings plans make specific disclosures, including
disclosure of costs associated with investments in the plans,
descriptions of the state tax consequences of investing in their plans
or in out-of-state plans, or disclosure of performance under uniform
standards.\23\
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\22\ See Oversight Hearing on 529 College Savings Plans, Hearing
Before the Subcomm. on Financial Management, The Budget, and
International Security of the Senate Comm. on Governmental Affairs,
108th Cong. (Sept. 30, 2004) (testimony of Ernesto A. Lanza, Senior
Associate General Counsel, MSRB).
\23\ When dealers market 529 college savings plans, the MSRB
requires time-of-trade disclosures of material information to
customers, including but not limited to disclosure of the possible
loss of state tax benefits if investing out-of-state. Proposed
Exchange Act Rule 15c2-3, if adopted, would mandate that point-of-
sale fee disclosures be made by dealers in a uniform manner.
Furthermore, the MSRB has adopted uniform requirements for the
calculation and presentation of up-to-date performance data in 529
college savings plan advertisements published by dealers that also
require that advertisements disclose the possible loss of state tax
benefits if investing out-of-state.
---------------------------------------------------------------------------
The MSRB is of the view that a more comprehensive and user-friendly
system of established industry sources is needed in the 529 college
savings plan market. Such a system would be based on centralized Web
sites providing direct access to official issuer disclosure materials
for the entire universe of 529 college savings plan offerings, together
with understandable educational information and tools allowing for
side-by-side comparisons of different 529 college savings plans. It is
crucial for ensuring that dealers and other investment professionals
seeking to provide advice to their customers on their college savings
options are able to do so with a full view of the available
alternatives. In addition, this maturation of the disclosure
dissemination system for the 529 college savings plan market would be
particularly crucial to allowing customers to have direct access to the
types of information and other resources they need to make informed
investment decisions, thereby promoting investor confidence in their
own abilities to make such informed choices, whether with the advice of
an investment professional or as a self-directed investor.
The MSRB understands that CSPN has undertaken to upgrade its
existing Web site to provide a comprehensive centralized Web-based
utility for the 529 college savings plan market.\24\ This CSPN utility
is expected to provide a combination of on-site and hyperlinked
resources, including summary information formatted to allow meaningful
comparisons of many of the material features of different 529 college
savings plans, together with direct links to all 529 college savings
plan program disclosure documents and related information as well as to
other sources providing tools designed for analyzing potential 529
college savings plan investments. The MSRB understands that the types
of material features to be disclosed through this utility include, but
are not limited to, state tax treatment and other state-based benefits,
costs associated with investments, types of underlying investments,
performance information and other important features that can vary
considerably from state to state, with hyperlinks embedded within such
summary information providing direct links to a full description of
such specific feature in the issuer's official program disclosure
document or other reliable sources. CSPN has also recently published
its DP-2, which updates its baseline disclosure standards designed to
assist the states in improving the quality and comparability of their
529 college savings plan disclosures in the program disclosure
document. In the 2005 Proposal, the MSRB had urged CSPN and the
individual 529 college savings plans to strive for the maximum possible
ease of access to, and uniformity of content in, the program disclosure
documents consistent with providing information that is complete,
understandable and not misleading. The MSRB views the upcoming
implementation of the CSPN Web site disclosure utility and the
development and universal adoption of DP-2 as significant steps toward
achieving the goals the MSRB had set out for the 529 college savings
plan market.
---------------------------------------------------------------------------
\24\ NAST. CSPN is an affiliate of NAST.
---------------------------------------------------------------------------
The CSPN utility will join other commercial, industry group and
[[Page 25871]]
regulator Web-based resources providing useful information for
individuals seeking to save for college expenses and for investment
professionals active in the 529 college savings plan market. Several
commercial ventures already provide, in summary and often tabular form,
some categories of information for all available 529 college savings
plans. Such information can include fees and expenses, minimum and
maximum investments, nature of the underlying investments, distribution
channels, and state tax treatment, as well as proprietary ratings based
on varying criteria. Much of this information is available at no cost,
with some sources making available, for a fee, premium or membership-
based services for professionals that provide greater detail or more
comprehensive analyses of the available information. Many of these
commercial Web sites have taken recent steps to augment and refine the
information they offer to the public, and the MSRB understands that
alternative pricing structures suitable for retail investors for access
to these premium services are being considered. In addition, the MSRB,
the Commission, NASD and the North American Securities Administrators
Association (``NASAA'') all provide general information about investing
in 529 college savings plans useful to individual investors and market
participants.\25\ NASD plans to introduce on its Web site in the near
future an improved expense analyzer for the 529 college savings plan
market using a live datafeed that should allow for more reliable
calculations and cost comparisons among different 529 college savings
plans. The CSPN utility is expected to serve as a central hub through
which investors can easily access many of these other Web-based
resources.
---------------------------------------------------------------------------
\25\ The MSRB provides information for investors in 529 college
savings plans at www.msrb.org/msrb1/mfs/ruleinfo.asp. The Commission
also has published an investor-oriented introduction to 529 college
savings plans at www.sec.gov/investor/pubs/intro529.htm. NASD has
created a college savings center for investors at https://
apps.nasd.com/investor_Information/Smart/529/000100.asp. NASAA, an
association of state securities regulators, has published (in
conjunction with CSPN and ICI) a brochure on understanding college
savings plans, available at www.nasaa.org/Investor_Education/
3136.cfm.
---------------------------------------------------------------------------
The MSRB believes that improved disclosures can only be effective
if potential investors actually access such disclosures with sufficient
time to make use of the information in coming to an investment
decision. The MSRB urges dealers and other participants in the 529
college savings plan market to provide the investing public with easy
access to, and to affirmatively encourage the use of, this market-wide
information. The MSRB will monitor the 529 college savings plan market
closely with respect to the concerns it sought to address through the
2005 Proposal. The MSRB will be acutely sensitive to, and will consider
whether further rulemaking would be appropriate in the event of, any
significant failures in the further development of the disclosure
dissemination system or in the efficacy of this dissemination system to
address the MSRB's stated investor protection concerns.
Time-of-Trade Disclosure Obligation in Connection With Out-of-State
Sales.
Summary. Currently, a dealer's time-of-trade disclosure obligation
under Rule G-17 requires the dealer, when selling an out-of-state 529
college savings plan interest to a customer, to disclose that,
depending upon the laws of the customer's home state, favorable state
tax treatment for investing in a 529 college savings plan may be
limited to investments made in a 529 college savings plan offered by
the customer's home state.\26\ The 2004 Proposal sought to broaden this
time-of-trade disclosure obligation to include reference to other
potential benefits (such as scholarships to in-state colleges, matching
grants into 529 college savings plan accounts, or reduced or waived
program fees, among other benefits), in addition to state tax benefits,
offered solely in connection with in-state investments.\27\
---------------------------------------------------------------------------
\26\ The 2002 Notice also stated that such disclosure, coupled
with a suggestion that the customer consult a tax adviser about any
state tax consequences of the investment, would provide adequate
notice of the potential loss of in-state tax benefits.
\27\ The 2004 Proposal would require the dealer to suggest that
the customer consult with a qualified adviser or contact his or her
home state's 529 college savings plan to learn more about any state
tax or other benefits that might be available in conjunction with an
investment in that state's 529 college savings plan.
---------------------------------------------------------------------------
The 2005 Proposal retained the baseline time-of-trade disclosure
proposed in the 2004 Proposal, with a modification to include reference
to the designated beneficiary's home state in addition to that of the
customer. The 2005 Proposal also would add to the baseline time-of-
trade disclosure a requirement that the dealer advise the customer that
any state-based benefits offered with respect to a particular 529
college savings plan should be considered as one of many appropriately
weighted factors that should be considered by the customer in making
his or her investment decision. The dealer also would be required to
suggest that the customer consult with his or her financial, tax or
other adviser to learn more about how such home state features
(including any limitations) may apply to the customer's specific
circumstances, and that the customer also may wish to contact his or
her home state or any other 529 college savings plan to learn more
about any state-based benefits (and any limitations thereto) that might
be available in conjunction with an investment in that state's 529
college savings plan.
In a significant expansion from the 2004 Proposal, the 2005
Proposal sought to impose the special home state disclosure proposal in
addition to the baseline time-of-trade disclosure described above.
Under this special home state disclosure proposal, a dealer would be
required to inquire of any out-of-state customer as to whether the
realization of state-based benefits was an important factor in the
customer's investment decision. If the customer were to answer
affirmatively, the dealer would be required to disclose (i) material
information available from established industry sources about state-
based benefits offered by the home state of the customer or designated
beneficiary for investing in its 529 college savings plan and (ii)
whether such state-based benefits are available in the case of an
investment in an out-of-state 529 college savings plan.
Finally, the 2005 Proposal reminded dealers that the time-of-trade
disclosure obligation with respect to sales of out-of-state 529 college
savings plan interests is in addition to dealers' existing general
obligation under Rule G-17 to disclose to their customers at the time
of trade all material facts known by dealers about the 529 college
savings plan interests they are selling to the customers, as well as
material facts about such 529 college savings plan that are reasonably
accessible to the market through established industry sources. Further,
the 2005 Proposal reminded dealers that disclosures made to customers
as required under MSRB rules do not relieve dealers of their
suitability obligations--including the obligation to consider the
customer's financial status, tax status and investment objectives--if
they have recommended investments in 529 college savings plans.
Comments. All commentators on the 2004 Proposal supported the
importance of ensuring disclosure to customers of the potential
existence of state-specific features of 529 college savings plans, with
many providing suggested modifications. CSF expressed concern about the
potential for over-emphasizing state variations in a way that may
[[Page 25872]]
detract from more fundamental considerations in making an investment
decision. Two commentators stated that not every difference in state
treatment ultimately will be a benefit to the investor, particularly in
view of potential recapture of state tax benefits or other restrictions
that some states impose under certain circumstances.\28\ These
commentators suggested that the best course would be to remind
investors to carefully review the program disclosure documents of their
home state programs and to consult their own advisors before investing,
with one commentator stating that it would be inappropriate to suggest
to investors that they seek help from their home state programs because
it is unclear whether the programs can provide complete information
regarding such consequences and because some states may seek to
persuade investors to make an investment in their program rather than
to impart disinterested information.\29\ Two other commentators stated
that the proposed disclosure should reflect that some benefits may be
dependent on the designated beneficiary's home state (rather than or in
addition to the home state of the investor).\30\
---------------------------------------------------------------------------
\28\ CSF and SIA.
\29\ CSF. However, Hawkins disagreed, stating that with respect
to non-tax state benefits, customers should be directed to the
specific state program for more information.
\30\ CSPN and FAME.
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Most commentators on the 2005 Proposal accepted the modified
baseline time-of-trade disclosure. However, most commentators strongly
opposed the newly proposed special home state disclosure proposal
requiring disclosure of specific in-state features that an out-of-state
investor may forego,\31\ with no commentator expressing support for
this proposal. Several commentators argued that the specific
disclosures under the special home state disclosure proposal would
inevitably result in state-based benefits being given disproportionate
weight as compared to the many other important factors to be considered
in making an investment decision.\32\ In addition, commentators
observed that, without a reliable source of market-wide information,
dealers would be required to undertake substantial effort (with
concomitant expenditure of resources) to understand and track the
details of constantly changing state law treatment of all 529 college
savings plans.\33\ Two commentators warned that requiring dealers to
make specific disclosures about 529 college savings plans they do not
offer could result in potential liability.\34\ SIA stated that the
special home state disclosure proposal would have the counter-intuitive
result of compromising a dealer's ability to develop in-depth expertise
regarding the range of investment products it is reasonably capable of
servicing. Wachovia expressed concern that this requirement would have
the potential to paralyze investors with an overabundance of
information.
---------------------------------------------------------------------------
\31\ AG Edwards, CSF, CSP-Maryland, CSPN, Georgia, ICI, Iowa,
Ohio TTA, SIA, T. Rowe, University of Alaska, USAA, Vanguard,
Virginia CSP, Wachovia and West Virginia.
\32\ AG Edwards, CSF, ICI and Vanguard.
\33\ Hancock, ICI, SIA, T. Rowe, USAA, Vanguard and Wachovia.
\34\ Hancock and ICI.
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The University of Alaska stated that it did not wish to have its
program features explained by dealers who are not authorized to market
its 529 college savings plan, with other commentators echoing the
concern that dealers would often be required to disclose information
about a security they do not offer and about which they may not have
sufficient expertise.\35\ CSF observed that the burden this requirement
would place on the 529 college savings plan market does not exist for
any other type of security. Two commentators suggested that the MSRB
await final action by the Commission on its point-of-sale disclosure
proposal before finalizing any significant changes in 529 college
savings plan disclosure requirements.\36\
---------------------------------------------------------------------------
\35\ ICI and Vanguard.
\36\ USAA and Wachovia.
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MSRB Response. The MSRB continues to believe that it is important
that investors are informed that they may be foregoing state tax and
other benefits offered by their home states by investing in out-of-
state 529 college savings plans. At the same time, the MSRB agrees that
there is a potential for over-emphasizing the importance of a
particular state's beneficial state tax treatment of an investment in
its 529 college savings plan, such as where a state offers a tax
benefit that ultimately is relatively small in value compared to the
financial impact that a marginally higher expense figure may have or
under a variety of other circumstances. As a result, the MSRB has
adopted the revised out-of-state disclosure obligation, which retains
the baseline time-of-trade disclosure as modified in the 2005 Proposal.
The MSRB believes that this time-of-trade disclosure in connection with
out-of-state sales of 529 college savings plans, as embodied in the
revised out-of-state disclosure obligation, achieves the appropriate
balance between providing for the disclosure to customers of material
information about the potential loss of state tax or other benefits
relevant to their investment decision in 529 college savings plans
without imposing a significant burden on dealers and other 529 college
savings plan market participants that could possibly result in an over-
simplification of the complexity of state law factors or an over-
emphasis of state law factors as compared to other relevant investment
factors. The MSRB has also retained the reminders in the 2005 Proposal
to the effect that these disclosures do not obviate other disclosure
requirements or suitability obligations arising as a result of a
recommendation.
The MSRB has determined not to retain the proposal to expand the
time-of-trade disclosure obligation to include disclosures of specific
state tax and other state-based features of the investor's home state
as set out in the special home state disclosure proposal. The MSRB has
based this determination in large measure on the potential adverse
impact of this proposal and the significant steps currently in process
toward improvements in the 529 college savings plan disclosure system.
Fulfilling the Revised Out-of-State Disclosure Obligation Through the
Program Disclosure Document.
Summary. The 2004 Proposal would have clarified that dealers could
meet their baseline time-of-trade disclosure obligation with respect to
potentially foregone in-state benefits through the issuer's program
disclosure document so long as the program disclosure document is
provided to the customer at or prior to the time of trade. The 2004
Proposal also would have strengthened the minimum standards for
prominence in the program disclosure document in order to meet the
baseline time-of-trade disclosure obligation. Thus, to meet this
obligation through the program disclosure document, the disclosure must
appear in a manner that is reasonably likely to be noted by an
investor. A presentation of this disclosure in the program disclosure
document in close proximity and with equal prominence to the first
presentation of information regarding other federal or state tax-
related consequences of investing in the 529 college savings plan, and
in close proximity and with equal prominence to each other presentation
of information regarding state tax-related consequences of investing in
the 529 college savings plan, would be deemed to satisfy this
requirement. The 2005 Proposal modified this presentation standard to
provide for equal prominence with the principal (rather than first)
presentation of substantive information regarding
[[Page 25873]]
other federal or state tax-related consequences of investing in the 529
plan, and the inclusion of a reference to this disclosure (rather than
restating such disclosure in full) in close proximity and with equal
prominence to each other presentation of information regarding state
tax-related consequences of investing in the 529 plan. Neither proposal
required that such disclosure be made through the program disclosure
document, noting that the MSRB does not have the authority to mandate
the inclusion of any particular item of information in the issuer's
disclosure document. Both proposals provided that dealers would be
required to separately make such disclosure if the program disclosure
document did not include the information in the manner prescribed.
Comments. Two commentators expressed concern that the 2004 Proposal
would effectively establish requirements for what information must be
included in the program disclosure document.\37\ They noted that the
MSRB does not have authority to directly impose such requirements. CSF
stated that the MSRB should not establish specific requirements for how
such disclosure should appear in the program disclosure document, while
two other commentators suggested limiting some of the presentation
requirements described in the 2004 Proposal.\38\ SIA stated that the
requirement that the information appearing in the program disclosure
document must appear in a manner ``reasonably likely to be noted by an
investor'' would place dealers in the position to question the judgment
of the state issuers and suggested that there should be a presumption
that the placement and adequacy of the disclosure in the program
disclosure document is reasonable.
---------------------------------------------------------------------------
\37\ CSPN and FAME. These commentators, as well as Hawkins,
noted that CSPN's DP-1 already contained language on this topic.
\38\ Hawkins and ICI.
---------------------------------------------------------------------------
CSPN also expressed concern with respect to the reformulation of
this language in the 2005 Proposal, stating that dealers would have to
determine whether the issuer has satisfactorily made such disclosures,
potentially calling into question the issuer's determination to include
or omit particular information.\39\ CSPN stated that this would create
a constant second-guessing aspect as to the validity of offering
materials created and distributed by state issuers. SIA stated that
this provision would likely lead dealers to create their own disclosure
documents for use in marketing 529 college savings plans, conflicting
with most distribution agreements and program disclosure documents.
---------------------------------------------------------------------------
\39\ CSP-Maryland, Georgia, Iowa, Ohio TTA, University of
Alaska, Virginia CSP and West Virginia supported CSPN's position.
---------------------------------------------------------------------------
MSRB Response. The MSRB reaffirms its view that it has no authority
to mandate the inclusion of any particular items in the issuer's
program disclosure document. As noted in both the 2004 and 2005
Proposals, disclosure through the program disclosure document in the
manner described by the MSRB is not the sole manner in which a dealer
may fulfill the revised out-of-state disclosure obligation. Just as a
dealer could meet this disclosure obligation through a separate
communication, it stands to reason that a disclosure made through the
program disclosure document in a manner that is reasonably likely to be
noted by an investor could also be used by a dealer to fulfill this
duty. Thus, the MSRB has provided in the proposed rule change that, if
the issuer has not included the information in the program disclosure
document in the manner described, inclusion in the program disclosure
document in another manner may nonetheless fulfill the dealer's out-of-
state disclosure obligation so long as disclosure in such other manner
is reasonably likely to be noted by an investor.\40\
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\40\ Some commentators stated that certain portions of the 2005
Proposal might not be consistent with the notion that the issuer's
program disclosure document serves as ``the fundamental, stand-alone
disclosure'' for the offering of its securities. See, e.g., AG
Edwards. The MSRB believes that dealers generally may view the
issuer's program disclosure document as the definitive source from
which to obtain information about the securities they are selling to
their customers. The requirement that a dealer make the revised out-
of-state disclosure separately if such disclosure is not included in
the program disclosure document in a manner reasonably likely to be
noted by an investor is not intended to imply otherwise, consistent
with prior Commission guidance regarding the obligations of
underwriters and other dealers in connection with municipal issuers'
disclosure materials under the federal securities laws. See Exchange
Act Release No. 26100 (September 22, 1988), 53 FR 37778 (Section
III--Municipal Underwriter Responsibilities), as modified by
Exchange Act Release No. 26985 (June 28, 1989), 54 FR 28799 (Section
III--Interpretation of Underwriter Responsibilities), and as
reaffirmed by Exchange Act Release No. 33741 (March 9, 1994), 59 FR
12748 (Section V--Interpretive Guidance with Respect to Obligations
of Municipal Securities Dealers).
---------------------------------------------------------------------------
General Suitability Obligations
Summary. The 2005 Proposal reaffirmed the guidance originally
provided in the 2002 Notice regarding general suitability standards
under Rule G-19 for recommended transactions in 529 college savings
plans. The 2005 Proposal added reminders to dealers to the effect that
their suitability obligation requires a meaningful analysis that
establishes the reasonable grounds for believing that the
recommendation is suitable and that they must have and enforce written
supervisory procedures reasonably designed to ensure compliance with
this obligation for every recommended transaction. The 2004 Proposal
did not address suitability issues.
Comments. No commentator opposed the 2005 Proposal's discussion of
general suitability standards.
MSRB Response. The MSRB has retained this discussion of general
suitability standards.
Comparative Suitability Obligation for Out-of-State Sales
Summary. The 2005 Proposal would require a dealer to undertake a
comparative suitability analysis if the dealer has recommended an out-
of-state 529 college savings plan transaction to a customer who has
indicated that one of his or her investment objectives is realization
of state-based benefits, as contemplated under the special home state
disclosure proposal. This would involve the consideration of the state-
based benefits available from the customer's home state 529 college
savings plan in a comparative analysis with the out-of-state 529
college savings plan being offered. Any such state-based benefits
offered with respect to a particular 529 college savings plan would be
considered as one of many appropriately weighted factors that have an
ultimate bearing on the relative strengths of a particular investment,
and the existence of state-based benefits would not create a
presumption that investment in the home state 529 college savings plan
is necessarily superior to an out-of-state 529 college savings plan. If
a dealer were to conclude that an investment in the home state 529
college savings plan would be superior to an investment in the offered
out-of-state 529 college savings plan under every reasonable scenario,
then the dealer would be obligated to inform the customer of this
determination and would be permitted to effect a transaction in the
offered out-of-state 529 college savings plan only if the customer has
directed to do so after this suitability determination has been
disclosed and if the out-of-state 529 college savings plan would,
without regard to the comparative analysis with the home state 529
college savings plan, be suitable for the customer under traditional
suitability standards. The 2004 Proposal did not contain comparable
language.
Comments. Most commentators strongly opposed the comparative
[[Page 25874]]
suitability proposal,\41\ although two commentators conceded that,
depending on the facts and circumstances, the availability of in-state
benefits may be one of many appropriate factors to consider in making a
suitability determination under traditional suitability standards.\42\
Three commentators stated that there has been no evidence of abuse in
the offering of out-of-state 529 college savings plans to justify these
new requirements, observing that no enforcement actions have been
taken.\43\ Several commentators observed that federal securities
regulation has never been premised on the concept that a dealer is
obligated to determine the most suitable investment of a particular
type for any customer and that the comparative suitability proposal is
inconsistent with the application of the suitability rule to every
other product sold by dealers.\44\ Two commentators stated that
comparisons are highly disfavored by NASD rules.\45\ The University of
Alaska noted that one result of a more stringent suitability obligation
for recommendations of 529 college savings plan transactions might be
that dealers would place their clients in other investment vehicles
that do not carry such regulatory risk.
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\41\ AG Edwards, CSF, CSP-Maryland, CSPN, Fidelity, Georgia,
Hancock, ICI, Iowa, NAST, Ohio TTA, PFPC, SIA, T. Rowe, University
of Alaska, USAA, Virginia CSP, Wachovia and West Virginia. No
commentator expressed support for the comparative suitability
proposal.
\42\ AG Edwards and Hancock.
\43\ CSF, ICI and USAA. NASD subsequently announced on October
26, 2005 that it had reached a settlement agreement with Ameriprise
Financial Services, Inc., in connection with the failure of the firm
to establish and maintain supervisory systems and procedures
reasonably designed to achieve compliance with suitability
obligations relating to recommended transactions in 529 college
savings plans. See www.nasd.com/web/idcplg?IdcService=SS_GET_
PAGE& ssDocName=NASDW--015319. This settlement agreement appears to
have been the basis for concern expressed by Fidelity and PFPC that
NASD may be incorporating the comparative suitability proposal into
its enforcement posture prior to its final approval. The MSRB
understands that NASD did not intend certain language included in
the settlement agreement to imply that the comparative suitability
proposal is currently in effect.
\44\ CSF, Fidelity, Hancock, PFPC, SIA, University of Alaska and
USAA.
\45\ CSF and SIA.
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Many commentators viewed the comparative suitability proposal as
effectively requiring dealers to become fully familiar with the terms
of all 529 college savings plans before offering any particular 529
college savings plan.\46\ These commentators argued that this
extraordinary burden is unprecedented and is likely to significantly
discourage the marketing of 529 college savings plans. NAST agreed,
emphasizing that the comparative suitability proposal would have
substantially increased the burden on the states themselves. Wachovia
suggested that the MSRB undertake a cost-benefit analysis before
adopting the comparative suitability proposal, while USAA stated that
the incremental costs associated with meeting this standard would cause
firms to reevaluate whether offering 529 college savings plans
continues to make sense or to pass the incremental costs on to
investors. AG Edwards argued that it is untenable to require a dealer
to inform a client that one 529 college savings plan is unequivocally
superior to another. Two other commentators stated that they are
receiving anecdotal evidence that some selling dealers are wi
