Federal Register: December 30, 2004 (Volume 69, Number 250)
DOCID: FR Doc 04-28581
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
DOCUMENT ID: [Release No. 34-50919; File No. SR-MSRB-2004-09]
NOTICE: NOTICES
ACTION: Self-regulatory organizations; proposed rule changes:
SUBJECT CATEGORY:
Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Advertisements of Municipal Fund Securities Under MSRB Rule G-21
DOCUMENT SUMMARY:
December 22, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b4 thereunder,\2\ notice is hereby given that
on December 16, 2004, 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 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 240.19b4.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The MSRB has filed with the SEC a proposed rule change amending Rule G21, on advertising, to establish specific requirements with respect to advertisements by brokers, dealers and municipal securities dealers (``dealers'') relating to municipal fund securities. The MSRB proposes an effective date for the proposed rule change of the first calendar day of the month beginning 90 or more calendar days after SEC approval.
Below is the text of the proposed rule change. Proposed new language is in italic; proposed deletions are in brackets.
* * * * *
Rule G21. Advertising.
(a)(c) No change.
(d) New Issue Advertisements. In addition to the requirements of
section (c), all advertisements for new issue municipal securities
(other than municipal fund securities) shall [also] be subject to the following requirements:
(i)(ii) No change.
(e) Municipal Fund Security Advertisements. In addition to the
requirements of section (c), all advertisements for municipal fund securities shall be subject to the following requirements:
[[Page 78500]]
(i) Required disclosures. Each advertisement for municipal fund securities:
(A) must include a statement that:
(1) advises an investor to consider the investment objectives,
risks, and charges and expenses associated with municipal fund securities before investing;
(2) explains that more information about municipal fund securities is available in the issuer's official statement;
(3) if the advertisement identifies a source from which an investor
may obtain an official statement and the broker, dealer or municipal
securities dealer that publishes the advertisement is the underwriter
for one or more of the issues of municipal fund securities for which
any such official statement may be supplied, states that such broker,
dealer or municipal securities dealer is the underwriter for one or
more issues (as appropriate) of such municipal fund securities; and
(4) states that the official statement should be read carefully before investing.
(B) that refers by name (including marketing name) to any municipal
fund security, issuer of municipal fund securities, state or other
governmental entity that sponsors the issuance of municipal fund
securities, or to any securities held as assets of municipal fund
securities or to any issuer thereof, must include the following disclosures, as applicable:
(1) unless the offer of such municipal fund securities is exempt
from Exchange Act Rule 15c212 and the issuer thereof has not produced
an official statement, a source from which an investor may obtain an official statement;
(2) if the advertisement relates to municipal fund securities
issued by a qualified tuition program under Internal Revenue Code
Section 529, a statement that advises an investor to consider, before
investing, whether the investor's or designated beneficiary's home
state offers any state tax or other benefits that are only available
for investments in such state's qualified tuition program; and
(3) if the advertisement is for a municipal fund security that the
issuer holds out as having the characteristics of a money market fund,
statements to the effect that an investment in the security is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency (unless such guarantee is provided by or on
behalf of such issuer) and, if the security is held out as maintaining
a stable net asset value, that although the issuer seeks to preserve
the value of the investment at $1.00 per share or such other applicable
fixed share price, it is possible to lose money by investing in the security.
(C) that includes performance data must include:
(1) a legend disclosing that the performance data included in the
advertisement represents past performance; that past performance does
not guarantee future results; that the investment return and the value
of the investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost (provided
that the disclosure with respect to investment value fluctuation is not
required for municipal fund securities that the issuer holds out as
having the characteristics of a money market fund and as maintaining a
stable net asset value); and that current performance may be lower or
higher than the performance data included in the advertisement; and
(2) if a sales load or any other nonrecurring fee is charged, the
maximum amount of the load or fee and, if the sales load or fee is not
reflected in the performance data included in the advertisement, a
statement that the performance data does not reflect the deduction of
the sales load or fee and that the performance data would be lower if such load or fee were included.
(D) must present the statements required by clauses (A), (B) and
(C) of this paragraph, when in a print advertisement, in a type size at
least as large as and of a style different from, but at least as
prominent as, that used in the major portion of the advertisement,
provided that when performance data is presented in a type size smaller
than that of the major portion of the advertisement, the statements
required by clause (C) of this paragraph may appear in a type size no
smaller than that of the performance data. If an advertisement is
delivered through an electronic medium, the legibility requirements for
the statements required by clauses (A), (B) and (C) of this paragraph
relating to type size and style may be satisfied by presenting the
statements in any manner reasonably calculated to draw investor
attention to them. In a radio or television advertisement, the
statements required by clauses (A), (B) and (C) of this paragraph must
be given emphasis equal to that used in the major portion of the
advertisement. The statements required by clause (C) of this paragraph
must be presented in close proximity to the performance data and, in a
print advertisement, must be presented in the body of the advertisement
and not in a footnote unless the performance data appears only in such footnote.
(ii) Performance data. Each advertisement that includes performance
data relating to municipal fund securities must present performance
data in the format, and calculated pursuant to the methods, prescribed
in paragraph (d) of Securities Act Rule 482 (or, in the case of a
municipal fund security that the issuer holds out as having the
characteristics of a money market fund, paragraph (e) of Securities Act Rule 482), provided that:
(A) to the extent that information necessary to calculate
performance data is not available from an applicable balance sheet
included in a registration statement, or from a prospectus, the broker,
dealer or municipal securities dealer shall use information derived
from the issuer's official statement, otherwise made available by the
issuer or its agents, or (when unavailable from the official statement,
the issuer or the issuer's agents) derived from such other sources
which the broker, dealer or municipal securities dealer reasonably believes are reliable;
(B) if the issuer first began issuing the municipal fund securities
fewer than one, five, or ten years prior to the date of the submission
of the advertisement for publication, such shorter period shall be
substituted for any otherwise prescribed longer period in connection
with the calculation of average annual total return or any similar returns;
(C) performance data shall be calculated as of the most recent
calendar quarter ended prior to the submission of the advertisement for
publication for which such performance data, or all information
required for the calculation of such performance data, is available to
the broker, dealer or municipal securities dealer as described in clause (A) of this paragraph;
(D) where such calculation is required to include expenses accrued
under a plan adopted under Investment Company Act Rule 12b1, the
broker, dealer or municipal securities dealer shall include all such
expenses as well as any expenses having the same characteristics as
expenses under such a plan where such a plan is not required to be
adopted under said Rule 12b1 as a result of Section 2(b) of the Investment Company Act of 1940;
(E) in calculating taxequivalent yields or aftertax returns, the
broker, dealer or municipal securities dealer shall assume that any
unreinvested distributions are used in the manner intended with respect
to such municipal fund securities in order to qualify for any federal taxexemption or other
[[Page 78501]]
federally taxadvantaged treatment with respect to such distributions, provided that:
(1) the advertisement must also provide a general description of
how federal law intends that such distributions be used and disclose
that such yield or return would be lower if distributions are not used in this manner; and
(2) if the theneffective federal income tax treatment upon which
such yield or return was based is subject to lapse or other adverse
change without extension or change of federal law, the advertisement
must disclose this fact and that such yield or return would be lower if
the theneffective federal income tax treatment is not extended or otherwise changed.
(F) notwithstanding any of the foregoing, this paragraph shall
apply solely to the calculation of performance relating to municipal
fund securities and does not apply to, or limit the applicability of
any rule of the Commission, NASD or any other regulatory body relating
to, the calculation of performance for any security held as an underlying asset of the municipal fund securities.
(iii) Nature of issuer and security. An advertisement for a
specific municipal fund security must provide sufficient information to
identify such specific security in a manner that is not false or
misleading. An advertisement that identifies a specific municipal fund
security must include the name of the issuer (or the issuer's marketing
name for its issuance of municipal fund securities, together with the
state of the issuer), presented in a manner no less prominent than any
other entity identified in the advertisement, and must not imply that a
different entity is the issuer of the municipal fund security. An
advertisement must not raise an inference that, because municipal fund
securities are issued under a governmentsponsored plan, investors are
guaranteed against investment losses if no such guarantee exists. If an
advertisement concerns a specific class or category of an issuer's
municipal fund securities (e.g., A shares versus B shares; direct sale
shares versus advisor shares; instate shares versus national shares;
etc.), this must clearly be disclosed in a manner no less prominent
than the information provided with respect to such class or category.
(iv) Capacity of dealer and other parties. An advertisement that
relates to or describes services provided with respect to municipal
fund securities must clearly indicate the entity providing those
services. If any person or entity other than the broker, dealer or
municipal securities dealer is named in the advertisement, the
advertisement must reflect any relationship between the broker, dealer
or municipal securities dealer and such other person or entity. An
advertisement soliciting purchases of municipal fund securities that
would be effected by a broker, dealer or municipal securities dealer or
any other entity other than the broker, dealer or municipal securities
dealer that publishes the advertisement must identify which entity
would effect the transaction, provided that the advertisement may
identify one or more such entities in general descriptive terms but
must specifically name any such other entity if it is the issuer, an
affiliate of the issuer, or an affiliate of the broker, dealer or
municipal securities dealer that publishes the advertisement.
(v) Tax consequences and other features. Any discussion of tax
implications or other benefits or features of investments in municipal
fund securities included in an advertisement must not be false or
misleading. In the case of an advertisement that includes statements
regarding tax or other benefits offered in connection with such
municipal fund securities or otherwise offered under state or federal
law, the advertisement also must state that the availability of such
tax or other benefits may be conditioned on meeting certain
requirements. If the advertisement describes the nature of specific
benefits, such advertisement must also briefly name the factors that
may materially limit the availability of such benefits (such as
residency, purpose for or timing of distributions, or other factors, as
applicable). Such statements of conditions or limitations must be
presented in close proximity to, and in a manner no less prominent than, the description of such benefits.
(vi) Underlying registered securities. If an advertisement for a
municipal fund security provides specific details of a security held as
an underlying asset of the municipal fund security, the details
included in the advertisement relating to such underlying security must
be presented in a manner that would be in compliance with any
Commission or NASD advertising rules that would be applicable if the
advertisement related solely to such underlying security; provided that
details of the underlying security must be accompanied by any further
statements relating to such details as are necessary to ensure that the
inclusion of such details does not cause the advertisement to be false
or misleading with respect to the municipal fund securities advertised.
This paragraph does not limit the applicability of any rule of the Commission, NASD or any other regulatory body relating to
advertisements of securities other than municipal fund securities,
including advertisements that contain information about such other
securities together with information about municipal securities. (f) [(e)] No change.
* * * * *
II. SelfRegulatory 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. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
Rule G21, on advertising, establishes standards for dealer
advertisements relating to municipal securities. The MSRB has
previously provided interpretive guidance to dealers regarding the
application of these standards to advertisements of municipal fund
securities.\3\ The proposed rule change amends Rule G21 to establish
specific standards applicable solely to dealer advertisements of
municipal fund securities. In particular, the proposed rule change
incorporates the advertising standards enunciated in the 2002 Notice [[Page 78502]]
into Rule G21, with certain modifications. In addition, the proposed
rule change includes specific requirements regarding the calculation
and display of performance data for municipal fund securities in a
manner consistent with Rule 482 adopted by the SEC under the Securities
Act of 1933, as amended (the ``Securities Act''),\4\ in connection with
the advertisement of mutual fund performance. The proposed rule change
also includes general disclosure requirements regarding municipal fund
securities that are similar in most respects to generalized disclosures
currently required for mutual fund advertisements under SEC rules.
\3\ See Rule G21 InterpretationApplication of Fair Practice
and Advertising Rules to Municipal Fund Securities, May 14, 2002,
reprinted in MSRB Rule Book (the ``2002 Notice''). The 2002 Notice
also confirmed previous guidance on advertisements of municipal fund securities published in 2001. See Rule G30 Interpretation
Interpretive Notice on Commissions and Other Charges, Advertisements
and Official Statements Relating to Municipal Fund Securities,
December 19, 2001, reprinted in MSRB Rule Book. Municipal fund
securities are municipal securities issued by an issuer that, but
for the application of Section 2(b) of the Investment Company Act of
1940, as amended (the ``Investment Company Act''), would constitute
an investment company within the meaning of the Investment Company
Act. The most common forms of municipal fund securities sold by
dealers consist of interests in trusts established by states as
qualified tuition programs under Section 529 of the Internal Revenue
Code of 1986, as amended (``529 college savings plans''), and
interests in local government investment pools (``LGIPs''). \4\ 15 U.S.C. 77a et seq.
General Disclosures
The proposed rule change includes in clauses (A) and (B) of Rule G
21(e)(i) disclosure provisions modeled after SEC general disclosure requirements for mutual fund advertisements, with certain
modifications. The modifications recognize the difference between the
prospectus required for mutual funds and the official statement
indirectly required for municipal fund securities under Rule 15c212
adopted by the SEC under the Act,\5\ as well as other differences in
characteristics between municipal fund securities and mutual funds.
\5\ SEC Rule 15c212 provides, among other things, that the
underwriter for most primary offerings of municipal securities must
obtain and review the issuer's nearfinal official statement before
purchasing or offering the securities, contract with the issuer to
receive copies of the final official statement within specified time frames after the final agreement to purchase or offer the
securities, and distribute copies of the official statement to
potential customers upon request. For purposes of the rule, a final
official statement must set forth information concerning the terms
of the issue; information, including financial or operating data,
concerning the issuer and other entities, enterprises, funds,
accounts and other persons material to an evaluation of the
offering; and a description of undertakings regarding the provision
of secondary market information, as well as disclosure of any
failures to provide such information during the past five years. A
final official statement need not contain each item of information
required to be included in a prospectus under the Securities Act.
New section (e)(i)(A) of Rule G21 requires that all dealer advertisements relating to municipal fund securities include generalized disclosure that: (1) Advises investors to consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing; (2) explains that more information about municipal fund securities is available in the issuer's official statement; (3) if the advertisement identifies a source from which an investor may obtain an official statement and the dealer that publishes the advertisement is the underwriter for the municipal fund securities for which such official statement may be supplied, states that such dealer is the underwriter for such municipal fund securities; and (4) states that the official statement should be read carefully before investing. The disclosures required in clauses (1), (2), and (4) of Rule G21(e)(i)(A) are substantially similar to the analogous disclosures required under section (b)(1)(i) of SEC Rule 482 in connection with a mutual fund advertisement that would be considered a prospectus under the Securities Act. The disclosure required in clause (3) of Rule G21(e)(i)(A) is substantially similar to the analogous disclosure required under section (b) of Rule 135a adopted by the SEC under the Securities Act in connection with generic mutual fund advertisements.
New section (e)(i)(B) of Rule G21 requires that all dealer advertisements that refer by name (including marketing name) to any municipal fund security, issuer of municipal fund securities, governmental entity that sponsors the issuance of municipal fund securities, or to any securities held as assets of municipal fund securities or to any issuer of such securities held as assets, must include additional disclosure that: (1) Identifies a source from which an investor may obtain an official statement; (2) if the advertisement relates to municipal fund securities issued through a 529 college savings plan, advises an investor to consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 college savings plan; and (3) if the advertisement is for a municipal fund security that the issuer holds out as having the characteristics of a money market fund, states that an investment in the security is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency (unless such guarantee is provided by or on behalf of such issuer) and that, if the security is held out as maintaining a stable net asset value, although the issuer seeks to preserve the value of the investment at a fixed share price, it is possible to lose money by investing in the security. The disclosure required in clause (1) of Rule G21(e)(i)(B) is substantially similar to the analogous disclosure required under section (b)(1)(i) of SEC Rule 482. The disclosure required in clause (3) of Rule G21(e)(i)(B) is substantially similar to the analogous disclosure required under section (b)(4) of SEC Rule 482. The disclosure required in clause (2) of Rule G21(e)(i)(B) is not derived from SEC mutual fund advertising rules but is analogous to the point ofsale disclosure obligation under Rule G17 described in the 2002 Notice.\6\
New section (e)(i)(D) of Rule G21 requires that these general
disclosures be presented in the same format required under SEC Rule 482.
\6\ The specific disclosure required in the proposed rule change
is somewhat broader than that currently required under the pointof
sale disclosure obligation described in the 2002 Notice. The MSRB
expects to file with the SEC in the near future a proposed rule
change that expands this pointofsale disclosure requirement under
Rule G17 to also reference the possible existence of other nontax state benefits. See MSRB Notice 200416 (June 10, 2004).
Historical Performance Data
The proposed rule change establishes in new section (e)(ii) of Rule G21 specific requirements with respect to the inclusion of performance data in municipal fund security advertisements.
Calculation and Display of Performance Data. Under the proposed
rule change, such advertisements must comply with the method of
computing and displaying performance data for mutual funds as
prescribed in section (d) or (e) of SEC Rule 482, with certain
modifications described below. In effect, for municipal fund securities
other than those that are held out by the issuer as having the
characteristics of a money market fund, quotations of performance in an
advertisement are limited to the average annual total return, current
yield (but only if accompanied by average annual total return), tax
equivalent yield (but only if accompanied by average annual total
return and current yield), aftertax return (but only if accompanied by
average annual total return), or other nonprescribed performance
measures (but only if accompanied by average annual total return and,
if adjusted to reflect the effects of taxes, aftertax return), as
provided in SEC Rule 482(d). In the case of municipal fund securities
that are held out by the issuer as having the characteristics of a
money market fund, quotations of performance in an advertisement are
limited to the current yield, effective yield (but only if accompanied
by current yield), taxequivalent yield or taxequivalent effective
yield (but only if accompanied by current yield), or total return (but
only if accompanied by current yield), as provided in SEC Rule 482(e).\7\
\7\ SEC Rule 482 incorporates the calculation methods set forth
in Forms N1, N3, and N4 for purposes of calculating the various
types of quotations described in the rule. These methods are also incorporated into Rule G21(e)(ii).
[[Page 78503]]
Clauses (A) through (E) of Rule G21(e)(ii) modify the basic
performance data calculation methods established for mutual funds to
reflect the fact that certain items of information that exist in the
mutual fund industrysuch as the registration statement and the
specific items of information required to be disclosed in the
prospectus and statement of additional informationdo not exist for
municipal fund securities, as well as to reflect other differences in
characteristics between municipal fund securities and mutual funds.
Thus, Rule G21(e)(ii) provides that: (A) A dealer can use information
provided in the issuer's official statement, otherwise made available
by the issuer, or otherwise obtained from other reliable sources to
calculate performance to the extent such information is not available
from a balance sheet in a registration statement or from a prospectus;
(B) the life of a municipal fund securities issue should be measured
from when the issuer first issues the securities; (C) performance data
in advertisements must be calculated as of the most recent calendar
quarter ended prior to the submission of the advertisement for
publication for which such performance data, or all information
required for the calculation of such performance data, is available to
the dealer; \8\ (D) expenses having the same characteristics as those
permitted to be paid under Rule 12b1 adopted by the SEC under the
Investment Company Act but not technically accrued under a 12b1 plan
must be treated as 12b1 expenses for purposes of calculating
performance; \9\ and (E) in calculating taxequivalent yields or after
tax returns, the dealer shall assume that any unreinvested
distributions are used in a manner that qualifies for any federal tax
exemption or other federally taxadvantaged treatment with respect to
such distributions, provided that: (1) The advertisement also provides
a general description of how federal law intends such distributions be
used and discloses that such yield or return would be lower if
distributions are not used in this manner; and (2) if the federal
income tax treatment upon which such yield or return is based is
subject to lapse or other adverse change without extension or change of
federal law, the advertisement must disclose this fact and that such
yield or return would be lower if the Federal income tax treatment is not extended or otherwise changed.
\8\ As noted in footnote 17 and accompanying text, infra, the
MSRB is publishing for comment concurrent with this filing a draft amendment that would modify this clause (C).
\9\ Thus, assetbased charges paid to the program manager or
investment advisor, to the issuer or its agents, or to any other
party generally are to be treated as 12b1 expenses for purposes of
calculating performance even if any such charges may not technically
be paid under a formal 12b1 plan. In addition, any 12b1 expenses
incurred in connection with underlying assets of the municipal fund
securities also must be treated as 12b1 expenses of the municipal
fund securities to the extent that such expenses are not waived or
not included within the assetbased charges described in the preceding sentence.
Performance data included in municipal fund security advertisements are required to be displayed in the manner provided in section (d) or (e) of SEC Rule 482, as appropriate, with respect to prominence and positioning of information.
Disclosures Accompanying Performance Data. New Section (e)(i)(C) of Rule G21 requires that advertisements that include performance data for municipal fund securities also include certain related legends and disclosures modeled after those required under SEC Rule 482 for mutual funds advertisements that display performance information. These disclosures emphasize that the performance data is historical and does not guarantee future results, that the value of holdings is subject to fluctuation (except where the municipal fund security is held out as having the characteristics of a money market fund and as maintaining a stable net asset value), and that current performance may be different from the performance data included in the advertisement.\10\ Advertisements containing performance data also are required to include the maximum amount of any sales load or other nonrecurring fee and, if such load or fee is not reflected in the performance data, to disclose that the load or fee is not so reflected and that performance would be lower if it had been reflected. These nonrecurring fees that are subject to disclosure include such fees imposed not only by the dealer but also by the issuer or any other party to the issuance of the municipal fund securities or the maintenance of investments therein. \10\ As noted in footnote 17 and accompanying text, infra, the MSRB is publishing for comment concurrent with this filing a draft amendment that would modify this provision.
New Section (e)(i)(D) requires that these legends and disclosures be presented in the same format required under SEC Rule 482. Additional Requirements
The proposed rule change includes in new paragraphs (iii) through (vi) of Rule G21(e) additional requirements with respect to municipal fund security advertisements, based largely on interpretive guidance provided in the 2002 Notice.
Nature of Issuer and Security. New paragraph (iii) requires that an advertisement: (1) for a specific municipal fund security provide sufficient information to identify the security in a manner that is not false or misleading; (2) that identifies a specific municipal fund security include the name of the issuer (or its marketing name, including state), presented in a manner no less prominent than any other entity identified in the advertisement, and not imply that a different entity is the issuer; (3) not raise an inference that, because municipal fund securities are issued under a government sponsored plan, investors are guaranteed against investment losses if no such guarantee exists; and (4) that concerns a specific class or category of municipal fund securities (e.g., A shares versus B shares; direct sale shares versus advisor shares; instate shares versus national shares; etc.) clearly disclose this fact in a manner no less prominent than the information provided with respect to such class or category.
Capacity of Dealer and Other Parties. New paragraph (iv) requires an advertisement about services provided with respect to municipal fund securities to clearly indicate the entity providing such services. If any person or entity other than the dealer is named in the advertisement, it must reflect any relationship between the dealer and such other person or entity. An advertisement soliciting purchases that would be effected by any party other than the dealer that publishes the advertisement (i.e., the issuer or another dealer) must identify which entity would effect the transaction, provided that it may identify one or more such entities in general descriptive terms but must specifically name any such other entity if it is the issuer, an affiliate of the issuer, or an affiliate of the dealer that publishes the advertisement.
Tax Consequences and Other Features. New paragraph (v) requires
that any discussion of tax implications or other benefits or features
of investments in municipal fund securities included in an
advertisement not be false or misleading. If an advertisement includes
statements regarding tax or other benefits offered in connection with
such municipal fund securities or otherwise offered under state or
federal law, it must also state that the availability of such tax or
other benefits may be conditioned on meeting certain requirements. If
the advertisement describes the nature of specific benefits, such
advertisement must also briefly name the factors that may materially limit the availability of
[[Page 78504]]
such benefits (such as residency, purpose for or timing of
distributions, or other factors, as applicable).\11\ Such statements of
conditions or limitations must be presented in close proximity to, and
in a manner no less prominent than, the description of such benefits.
\11\ For example, if an advertisement notes that investors in a
particular 529 college savings plan may qualify for scholarships or
matching grants, it may also need to state that such scholarships or
matching grants are available only for attendance at instate
colleges or to instate investors, if that is in fact the case.
Underlying Registered Securities. New paragraph (vi) requires that, if an advertisement for a municipal fund security provides specific details of a security held as an underlying asset of the municipal fund security, the details included in the advertisement relating to such underlying security be presented in a manner that would be in compliance with any SEC or NASD advertising rules that would be applicable if the advertisement related solely to such underlying security. Details of the underlying security included in the advertisement must be accompanied by any further statements necessary to ensure that the inclusion of such details does not cause the advertisement to be false or misleading with respect to the municipal fund securities advertised. This provision does not limit the applicability of any rule of the SEC, NASD or any other regulatory body relating to advertisements of securities other than municipal fund securities, including advertisements that contain information about such other securities together with information about municipal fund securities.
Exemption From New Issue Price/Yield Requirement
The proposed rule change exempts municipal fund security advertisements from the provision of Rule G21(d) relating to advertisements of initial reoffering prices or yields of new issue municipal securities. This provision is designed for advertisements by underwriting syndicates for municipal debt offerings and does not deal with matters relevant to municipal fund securities.
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
section 15B(b)(2)(C) of the Act,\12\ which requires that the rules of
the MSRB 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* * *.\13\
\12\ 15 U.S.C. 78o4(b)(2)(C).
\13\ Id.
The MSRB believes that the proposed rule change is consistent with
the Act because it will further investor protection by raising the
standards for advertisements of municipal fund securities and by making
information provided in such advertisements comparable for different
municipal fund securities investments and between municipal fund securities and registered mutual funds.
B. SelfRegulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change will impose 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. SelfRegulatory 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 rule changes
to Rule G21 with respect to advertisements of municipal fund
securities.\14\ The MSRB received eight comment letters.\15\ After
reviewing these comments, the MSRB approved the draft amendments, with
certain modifications, for filing with the SEC. The comments and modifications to the draft amendments are discussed below.
\14\ See MSRB Notice 200416 (June 10, 2004).
\15\ Letter from Kenneth B. Roberts, Hawkins Delafield & Wood
LLP (``Hawkins''), to Ernesto A. Lanza, Senior Associate General
Counsel, MSRB, dated August 20, 2004; letter from Mary L. Schapiro,
Vice Chairman, NASD, and President, Regulatory Policy and Oversight,
to Ernesto A. Lanza, dated September 9, 2004; letter from Tamara K.
Salmon, Senior Associate Counsel, Investment Company Institute
(``ICI''), to Ernesto A. Lanza, dated September 10, 2004; letter
from David J. Pearlman, College Savings Foundation (``CSF''), to
Ernesto A. Lanza, dated September 13, 2004; letter from Elizabeth L.
Bordowitz, General Counsel, Finance Authority of Maine (``FAME''),
to Ernesto A. Lanza, dated September 13, 2004; letter from Diana F.
Cantor, Chair, College Savings Plan Network (``CSPN''), and
Executive Director, Virginia College Savings Plan, to Ernesto A.
Lanza, dated September 15, 2004; letter from Elizabeth Varley and
Michael D. Udoff, CoStaff Advisers, Securities Industry Association
(``SIA'') Ad Hoc 529 Plans Committee, to Ernesto A. Lanza, dated
September 15, 2004; and letter from Raquel Alexander, PhD, Assistant
Professor, and LeAnn Luna, PhD, Assistant Professor, University of
North Carolina at Wilmington, to Ernesto A. Lanza, dated September
15, 2004. Most commentators also provided comments on the proposed
modification to the MSRB's existing pointofsale disclosure
obligation relating to sales of outofstate 529 college savings
plans, as described in the June notice. The MSRB expects to file
with the SEC in the near future a proposed rule change that expands
this pointofsale disclosure requirement under Rule G17 to also
reference the possible existence of other nontax state benefits.
The MSRB will address comments on this subject at that time. General Disclosures
Summary of Draft Amendment. Draft Rule G21(e)(i)(A) would require dealer advertisements of municipal fund securities to include generalized disclosure to the effect that investors should consider the securities' investment objectives, risks and charges before investing; that more information about the securities is available in the issuer's official statement; identifies where an official statement can be obtained; and states that the official statement should be read carefully before investing. Advertisements of 529 college savings plans also must advise investors to consider whether their home states offer state tax or other benefits only available for investments in the in state plans. Further, advertisements for municipal fund securities that are marketed as money market securities would be required to disclose that investments are not insured and, if marketed as maintaining a stable net asset value, it is still possible to lose money. These disclosures would be required to be given emphasis equal to that used in the major portion of the advertisement. In addition, the MSRB sought comment on whether the rule should require that dealers that advertise 529 college savings plans include in their generalized disclosure language the URL of an MSRBmaintained Web site where investors can obtain general information about the 529 college savings plan market.
Discussion of Comments. Commentators generally supported the proposed general disclosures, with several providing suggested changes.
[[Page 78505]]
distributed solely within such state, the advertisement should be exempted from the proposed disclosure regarding potential benefits of investing in an instate plan.
The MSRB agrees that the general disclosure language in Rule G 21(e)(i)(B)(2) should be modified to include reference to the designated beneficiary when discussing the benefits of instate investments. However, the MSRB does not believe that the additional changes suggested by the commentators should be made. The MSRB believes that disclosure of potential instate benefits should apply to all 529 college savings plan advertisements, even if the advertisement for a 529 college savings plan offered solely within a particular state is distributed solely within that state, as this would ensure uniform practices and avoid sometimes difficult factual determinations.
The MSRB notes that SEC Rule 135a effectively permits the use of certain types of mutual fund advertisements containing very limited information without including the disclosures required under SEC Rule 482. SEC Rule 135a covers advertisements that include no more than explanatory information relating to mutual funds generally and/or to specific categories of mutual funds, as well as an invitation to inquire for further information. Such advertisements must contain the name and address of the dealer sponsoring the advertisement and whether the dealer is the principal underwriter of any mutual fund with respect to which information will be sent to any investor who asks for more information. However, such advertisements must not specifically refer by name to any mutual fund or fund family.
The suggestion of CSF and SIA would provide for including the name of the 529 college savings plan and its sponsoring state, unlike under SEC Rule 135a. However, their proposal would provide for retaining certain of the general disclosures of the proposal that are not otherwise required under SEC Rule 135a. The MSRB believes that the general disclosure provision should be modified to permit more abbreviated general disclosures, set forth in Rule G21(e)(i)(A), where an advertisement does not refer by name (including marketing name) to any specific municipal fund security, issuer of municipal fund securities or state or other governmental entity that sponsors the issuance of municipal fund securities, or to any securities held as assets of municipal fund securities or to any issuer of such securities held as assets. Such disclosures would be limited to statements advising investors to consider the investment objectives, risks and charges of municipal fund securities before investing; that more information about municipal fund securities is available in the issuer's official statement; and that the official statement should be read carefully before investing. Because these disclosures would be considerably shorter than otherwise required, the MSRB does not believe that the equal prominence requirement for such statements should be changed. Further, the MSRB does not believe that dealers should be permitted to identify a specific product in advertisements where only these more abbreviated general disclosures are provided. Any advertisement that specifically identifies a product must also include the general disclosures set forth in Rule G21(e)(i)(B), as applicable.
advertisements include reference to an MSRBmaintained Web site on 529 college savings plans, and no commentator supported such a requirement. The MSRB will take no further action with respect to such proposal at this time. However, the MSRB will continue to maintain and update its existing Web pages, at http://www.msrb.org/msrb1/mfs, that provide generalized information about municipal fund securities.
Performance Data
Summary of Proposal. Draft Rule G21(e)(ii) would require advertisements that include performance data to comply with the method of computing and displaying mutual fund performance data provided under SEC Rule 482, with certain modifications. Among other things, the draft amendment would require that performance data shown in an advertisement be calculated as of the most recent calendar quarter for which such data, or all information required to calculate such performance data, is reasonably available to the dealer. SEC Rule 482 requires that such data be shown in mutual fund advertisements as of the most recent calendar quarter but does not make the determination of which calendar quarter is the most recent dependent upon the availability of such data.
In addition, draft Rule G21(e)(i) would require certain related disclosures for municipal fund securities advertisements that contain performance data. The disclosures emphasize that the performance information is historical and does not guarantee future results, the value of holdings is subject to fluctuation, and current performance may be lower or higher than the performance quoted. Advertisements containing performance data also would be required to include basic information about sales loads and other nonrecurring fees and note the impact of such loads or fees on performance as shown. The disclosures must be given emphasis equal to that of the performance data itself. These disclosures are required under SEC Rule 482 in mutual funds advertisements that display performance information.
Discussion of Comments. Commentators generally supported the
proposed performance data calculation methods and related legends and [[Page 78506]]
disclosures, with several providing suggested changes.
The language used in the draft amendment was not designed to give
dealers latitude in deciding which timeframes to include in
advertisements, nor would it normally lead to a different result under
the draft rule as compared to SEC Rule 482.\16\ Rather, the language
reflects the MSRB's recognition that its rulemaking should not be used
to indirectly regulate state issuers in structuring their programs and
that a state's structure might result in making compliance with the
specific language of Rule 482 impossible without forcing a change in
the structure. However, to mitigate the possibility of unintended
ambiguity and possible inconsistent application of the rule between
different dealers, the MSRB has modified the language of Rule G
21(e)(ii)(C) to provide that calculations must be made as of the most
recent quarter for which necessary information is available, rather
than when such information is reasonably available. Dealers wishing to
advertise performance would be tasked with taking all appropriate
actions necessary to obtain information that is in fact available for purposes of such calculation.
\16\ The MSRB notes that SEC Rule 482(g) provides a basic
timeliness standard based on the ``most recent practicable date
considering the type of investment company and the media through
which data will be conveyed'' that also could be viewed as giving some latitude in deciding which timeframes to include in
advertisements.
\17\ See MSRB Notice 200443 (December 16, 2004).
The MSRB does not believe that such assumptions about the tax exempt nature of 529 college savings plan investments should apply for all purposes of calculating performance. Thus, the baseline total return calculation would continue to ignore all tax effects. However, in calculating taxequivalent yields or aftertax returns, the MSRB believes it is appropriate to assume that unreinvested distributions are used for purposes that would maintain any intended federal tax benefit, as set forth in Rule G21(e)(ii)(E). Such assumption would require that the advertisement include a general description of how federal law intends that such distributions be used to maintain the favorable tax treatment and a disclosure that the taxequivalent yield or aftertax return would be lower if distributions are not used in such manner. In addition, if the favorable tax treatment is subject to lapse or other adverse change without extension or other change of law, the advertisement must disclose this fact and that such yield or return would be lower if the favorable tax treatment is not extended or otherwise changed.
Further, the MSRB does not believe that the provision requiring the inclusion of after taxreturn should be eliminated. The only circumstance in which a dealer would be required to show aftertax return is if the advertisement also includes a performance measure that is adjusted to reflect the effect of taxes (e.g., a tax equivalent return intended to show how the tax benefits of investing in 529 college savings plans compares to other fully taxable investments). Under this circumstance, it is appropriate that the advertisement also include performance that does not include such adjustment.
Additional Requirements
Draft Rule G21 would incorporate, with certain modifications,
several existing interpretive positions from the 2002 Notice.
Commentators generally supported the incorporation of these positions into the rule, with several providing suggested changes.
CSF argued that, in some cases, providing the name of the legal
issuer in connection with 529 college savings plan securities may not
help consumers understand the nature of the issuer and may result in
confusion since the legal issuer may be an obscure state trust. CSF
suggested that it would be more helpful to identify the 529 college
savings plan by marketing name, together with the name of the state
that establishes and maintains the plan. CSF also suggested that
dealers be permitted to include the marketing logo, rather than a logo
of the legal issuer, in advertisements, which logo should appear at
least as prominently as the dealer's logo. SIA stated that the
requirement that the issuer's name be given equal prominence to that of
the dealer is unnecessary and subject to second guessing. SIA argued
that the policy objective of the proposed rule, which is to prevent investor confusion
[[Page 78507]]
as to who the issuer of the security is, is satisfied by the other
requirements set forth in this section that the issuer be identified
and that the advertisement not imply that another entity is the issuer of the security.
The MSRB believes that it is appropriate to permit dealers to use
the marketing name and state of a 529 college savings plan in
substitution for the legal name of the issuer. However, the MSRB does
not agree that such issuer information should be permitted to be
presented in a manner that is less prominent than any other entity
identified in the advertisement. This provision would also permit the
use of the 529 college savings plans logo, so long as such logo is
presented in a manner no less prominent than any other entity's logo included in the advertisement.
CSF and SIA argued that many 529 college savings plans are marketed through hundreds of dealers and it would be extremely difficult if not impossible for a primary distributor to list in its advertisement all such dealers. CSF suggested that only dealers that are affiliates of the dealer publishing the advertisement and, if applicable, the issuer itself be required to be identified by name in such advertisements. NASD stated that this provision resembles, but is not identical to, NASD Rule 2210(d)(2)(C), which generally requires that all sales material prominently disclose the name of the member and, if it includes other names, reflect which products or services are being offered by the member.
It was not the intent of the original proposal to require that a
primary distributor list its many hundreds of selling dealers used in
the 529 college savings plan's distribution channels. The MSRB has
modified this provision so that the only parties effecting transactions
in municipal fund securities that must be specifically named in an
advertisement are the dealer publishing the advertisement, any other
dealer affiliated with such dealer and the issuer, as applicable. In
addition, the rule language has been revised to more closely track the
NASD requirement that, if any parties other than the dealer is named in
a municipal fund securities advertisement, the products or services
offered by such parties in connection with such municipal fund securities must be stated.
CSF argued that state tax treatment of 529 college savings plans is extremely complex and that not all variations in state treatment will be a benefit to instate investors. It suggested that the reference in the rule language to ``state tax or other benefits'' should be changed to ``different state tax or other consequences.'' CSF also expressed concern over the proposal's requirement that an advertisement that includes information about tax or other state benefits must ``make clear the nature of such benefits.'' CSF stated:
If all that would be required is a general statement that tax and other benefits may be available only through the homestate program, the guidance should so state. . . . If a laundry list of all potential aspects of differing treatment is required, we are concerned that such a list could not practically be updated to account for all new state laws, and that even if it could, space limitations would make it impractical or impossible to achieve compliance.
CSPN and Hawkins stated that only general statements of limitation are appropriate where an advertisement contains only general statements of benefits, so long as the investor is directed to the official statement for additional information. Hawkins suggested that the proposed rule language appears to require dealer advertisements that refer in any manner to tax or other benefits to include a detailed description of the nature of, and of limitations applicable to receipt of, such benefits. Hawkins argued that it may be impractical to include such a detailed description within most advertisements without resulting in potentially misleading or incomplete statements.
FAME suggested certain changes to terminology in this provision, stating that references to ``shares'' are not appropriate for many 529 college savings plans. In addition, CSPN and FAME stated that some state benefits may not be specifically provided for under state law but are created by state entities under general grants of authority.
The MSRB has modified the rule language to more narrowly focus the types of disclosures that would be required to be made in an advertisement that includes descriptions of tax or other beneficial features offered under state or federal law in connection with an investment in municipal fund securities. Thus, the modified language would make clear that general statements regarding the existence of beneficial features would not require an extensive listing of all such features but would require general disclosure that such features may be subject to limitations. However, as the information about tax matters becomes more detailed, the rule would require comparably detailed discussion of potential limitations. However, the reference to ``benefits'' has not been eliminated from the rule. The rule already addresses the broader concept of ``tax implications'' but is also specifically aimed at ensuring that the ``hyping'' of beneficial treatment is tempered by an equally prominent discussion of potential limitations. Further, certain limited modifications have been made to the rule language to address the concerns regarding use of the term ``shares'' and reference to benefits provided under state law. 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 the first calendar day of the month beginning 90 or more calendar days after SEC 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 selfregulatory 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.
[[Page 78508]]
IV. Solicitation of Comments
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
Paper Comments
All submissions should refer to File Number SRMSRB200409. This file number should be included on the subject line if email 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 (
DOCUMENT BODY 2:
December 22, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b4 thereunder,\2\ notice is hereby given that
on December 16, 2004, 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 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 240.19b4.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The MSRB has filed with the SEC a proposed rule change amending Rule G21, on advertising, to establish specific requirements with respect to advertisements by brokers, dealers and municipal securities dealers (``dealers'') relating to municipal fund securities. The MSRB proposes an effective date for the proposed rule change of the first calendar day of the month beginning 90 or more calendar days after SEC approval.
Below is the text of the proposed rule change. Proposed new language is in italic; proposed deletions are in brackets.
* * * * *
Rule G21. Advertising.
(a)(c) No change.
(d) New Issue Advertisements. In addition to the requirements of
section (c), all advertisements for new issue municipal securities
(other than municipal fund securities) shall [also] be subject to the following requirements:
(i)(ii) No change.
(e) Municipal Fund Security Advertisements. In addition to the
requirements of section (c), all advertisements for municipal fund securities shall be subject to the following requirements:
[[Page 78500]]
(i) Required disclosures. Each advertisement for municipal fund securities:
(A) must include a statement that:
(1) advises an investor to consider the investment objectives,
risks, and charges and expenses associated with municipal fund securities before investing;
(2) explains that more information about municipal fund securities is available in the issuer's official statement;
(3) if the advertisement identifies a source from which an investor
may obtain an official statement and the broker, dealer or municipal
securities dealer that publishes the advertisement is the underwriter
for one or more of the issues of municipal fund securities for which
any such official statement may be supplied, states that such broker,
dealer or municipal securities dealer is the underwriter for one or
more issues (as appropriate) of such municipal fund securities; and
(4) states that the official statement should be read carefully before investing.
(B) that refers by name (including marketing name) to any municipal
fund security, issuer of municipal fund securities, state or other
governmental entity that sponsors the issuance of municipal fund
securities, or to any securities held as assets of municipal fund
securities or to any issuer thereof, must include the following disclosures, as applicable:
(1) unless the offer of such municipal fund securities is exempt
from Exchange Act Rule 15c212 and the issuer thereof has not produced
an official statement, a source from which an investor may obtain an official statement;
(2) if the advertisement relates to municipal fund securities
issued by a qualified tuition program under Internal Revenue Code
Section 529, a statement that advises an investor to consider, before
investing, whether the investor's or designated beneficiary's home
state offers any state tax or other benefits that are only available
for investments in such state's qualified tuition program; and
(3) if the advertisement is for a municipal fund security that the
issuer holds out as having the characteristics of a money market fund,
statements to the effect that an investment in the security is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency (unless such guarantee is provided by or on
behalf of such issuer) and, if the security is held out as maintaining
a stable net asset value, that although the issuer seeks to preserve
the value of the investment at $1.00 per share or such other applicable
fixed share price, it is possible to lose money by investing in the security.
(C) that includes performance data must include:
(1) a legend disclosing that the performance data included in the
advertisement represents past performance; that past performance does
not guarantee future results; that the investment return and the value
of the investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost (provided
that the disclosure with respect to investment value fluctuation is not
required for municipal fund securities that the issuer holds out as
having the characteristics of a money market fund and as maintaining a
stable net asset value); and that current performance may be lower or
higher than the performance data included in the advertisement; and
(2) if a sales load or any other nonrecurring fee is charged, the
maximum amount of the load or fee and, if the sales load or fee is not
reflected in the performance data included in the advertisement, a
statement that the performance data does not reflect the deduction of
the sales load or fee and that the performance data would be lower if such load or fee were included.
(D) must present the statements required by clauses (A), (B) and
(C) of this paragraph, when in a print advertisement, in a type size at
least as large as and of a style different from, but at least as
prominent as, that used in the major portion of the advertisement,
provided that when performance data is presented in a type size smaller
than that of the major portion of the advertisement, the statements
required by clause (C) of this paragraph may appear in a type size no
smaller than that of the performance data. If an advertisement is
delivered through an electronic medium, the legibility requirements for
the statements required by clauses (A), (B) and (C) of this paragraph
relating to type size and style may be satisfied by presenting the
statements in any manner reasonably calculated to draw investor
attention to them. In a radio or television advertisement, the
statements required by clauses (A), (B) and (C) of this paragraph must
be given emphasis equal to that used in the major portion of the
advertisement. The statements required by clause (C) of this paragraph
must be presented in close proximity to the performance data and, in a
print advertisement, must be presented in the body of the advertisement
and not in a footnote unless the performance data appears only in such footnote.
(ii) Performance data. Each advertisement that includes performance
data relating to municipal fund securities must present performance
data in the format, and calculated pursuant to the methods, prescribed
in paragraph (d) of Securities Act Rule 482 (or, in the case of a
municipal fund security that the issuer holds out as having the
characteristics of a money market fund, paragraph (e) of Securities Act Rule 482), provided that:
(A) to the extent that information necessary to calculate
performance data is not available from an applicable balance sheet
included in a registration statement, or from a prospectus, the broker,
dealer or municipal securities dealer shall use information derived
from the issuer's official statement, otherwise made available by the
issuer or its agents, or (when unavailable from the official statement,
the issuer or the issuer's agents) derived from such other sources
which the broker, dealer or municipal securities dealer reasonably believes are reliable;
(B) if the issuer first began issuing the municipal fund securities
fewer than one, five, or ten years prior to the date of the submission
of the advertisement for publication, such shorter period shall be
substituted for any otherwise prescribed longer period in connection
with the calculation of average annual total return or any similar returns;
(C) performance data shall be calculated as of the most recent
calendar quarter ended prior to the submission of the advertisement for
publication for which such performance data, or all information
required for the calculation of such performance data, is available to
the broker, dealer or municipal securities dealer as described in clause (A) of this paragraph;
(D) where such calculation is required to include expenses accrued
under a plan adopted under Investment Company Act Rule 12b1, the
broker, dealer or municipal securities dealer shall include all such
expenses as well as any expenses having the same characteristics as
expenses under such a plan where such a plan is not required to be
adopted under said Rule 12b1 as a result of Section 2(b) of the Investment Company Act of 1940;
(E) in calculating taxequivalent yields or aftertax returns, the
broker, dealer or municipal securities dealer shall assume that any
unreinvested distributions are used in the manner intended with respect
to such municipal fund securities in order to qualify for any federal taxexemption or other
[[Page 78501]]
federally taxadvantaged treatment with respect to such distributions, provided that:
(1) the advertisement must also provide a general description of
how federal law intends that such distributions be used and disclose
that such yield or return would be lower if distributions are not used in this manner; and
(2) if the theneffective federal income tax treatment upon which
such yield or return was based is subject to lapse or other adverse
change without extension or change of federal law, the advertisement
must disclose this fact and that such yield or return would be lower if
the theneffective federal income tax treatment is not extended or otherwise changed.
(F) notwithstanding any of the foregoing, this paragraph shall
apply solely to the calculation of performance relating to municipal
fund securities and does not apply to, or limit the applicability of
any rule of the Commission, NASD or any other regulatory body relating
to, the calculation of performance for any security held as an underlying asset of the municipal fund securities.
(iii) Nature of issuer and security. An advertisement for a
specific municipal fund security must provide sufficient information to
identify such specific security in a manner that is not false or
misleading. An advertisement that identifies a specific municipal fund
security must include the name of the issuer (or the issuer's marketing
name for its issuance of municipal fund securities, together with the
state of the issuer), presented in a manner no less prominent than any
other entity identified in the advertisement, and must not imply that a
different entity is the issuer of the municipal fund security. An
advertisement must not raise an inference that, because municipal fund
securities are issued under a governmentsponsored plan, investors are
guaranteed against investment losses if no such guarantee exists. If an
advertisement concerns a specific class or category of an issuer's
municipal fund securities (e.g., A shares versus B shares; direct sale
shares versus advisor shares; instate shares versus national shares;
etc.), this must clearly be disclosed in a manner no less prominent
than the information provided with respect to such class or category.
(iv) Capacity of dealer and other parties. An advertisement that
relates to or describes services provided with respect to municipal
fund securities must clearly indicate the entity providing those
services. If any person or entity other than the broker, dealer or
municipal securities dealer is named in the advertisement, the
advertisement must reflect any relationship between the broker, dealer
or municipal securities dealer and such other person or entity. An
advertisement soliciting purchases of municipal fund securities that
would be effected by a broker, dealer or municipal securities dealer or
any other entity other than the broker, dealer or municipal securities
dealer that publishes the advertisement must identify which entity
would effect the transaction, provided that the advertisement may
identify one or more such entities in general descriptive terms but
must specifically name any such other entity if it is the issuer, an
affiliate of the issuer, or an affiliate of the broker, dealer or
municipal securities dealer that publishes the advertisement.
(v) Tax consequences and other features. Any discussion of tax
implications or other benefits or features of investments in municipal
fund securities included in an advertisement must not be false or
misleading. In the case of an advertisement that includes statements
regarding tax or other benefits offered in connection with such
municipal fund securities or otherwise offered under state or federal
law, the advertisement also must state that the availability of such
tax or other benefits may be conditioned on meeting certain
requirements. If the advertisement describes the nature of specific
benefits, such advertisement must also briefly name the factors that
may materially limit the availability of such benefits (such as
residency, purpose for or timing of distributions, or other factors, as
applicable). Such statements of conditions or limitations must be
presented in close proximity to, and in a manner no less prominent than, the description of such benefits.
(vi) Underlying registered securities. If an advertisement for a
municipal fund security provides specific details of a security held as
an underlying asset of the municipal fund security, the details
included in the advertisement relating to such underlying security must
be presented in a manner that would be in compliance with any
Commission or NASD advertising rules that would be applicable if the
advertisement related solely to such underlying security; provided that
details of the underlying security must be accompanied by any further
statements relating to such details as are necessary to ensure that the
inclusion of such details does not cause the advertisement to be false
or misleading with respect to the municipal fund securities advertised.
This paragraph does not limit the applicability of any rule of the Commission, NASD or any other regulatory body relating to
advertisements of securities other than municipal fund securities,
including advertisements that contain information about such other
securities together with information about municipal securities. (f) [(e)] No change.
* * * * *
II. SelfRegulatory 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. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
Rule G21, on advertising, establishes standards for dealer
advertisements relating to municipal securities. The MSRB has
previously provided interpretive guidance to dealers regarding the
application of these standards to advertisements of municipal fund
securities.\3\ The proposed rule change amends Rule G21 to establish
specific standards applicable solely to dealer advertisements of
municipal fund securities. In particular, the proposed rule change
incorporates the advertising standards enunciated in the 2002 Notice [[Page 78502]]
into Rule G21, with certain modifications. In addition, the proposed
rule change includes specific requirements regarding the calculation
and display of performance data for municipal fund securities in a
manner consistent with Rule 482 adopted by the SEC under the Securities
Act of 1933, as amended (the ``Securities Act''),\4\ in connection with
the advertisement of mutual fund performance. The proposed rule change
also includes general disclosure requirements regarding municipal fund
securities that are similar in most respects to generalized disclosures
currently required for mutual fund advertisements under SEC rules.
\3\ See Rule G21 InterpretationApplication of Fair Practice
and Advertising Rules to Municipal Fund Securities, May 14, 2002,
reprinted in MSRB Rule Book (the ``2002 Notice''). The 2002 Notice
also confirmed previous guidance on advertisements of municipal fund securities published in 2001. See Rule G30 Interpretation
Interpretive Notice on Commissions and Other Charges, Advertisements
and Official Statements Relating to Municipal Fund Securities,
December 19, 2001, reprinted in MSRB Rule Book. Municipal fund
securities are municipal securities issued by an issuer that, but
for the application of Section 2(b) of the Investment Company Act of
1940, as amended (the ``Investment Company Act''), would constitute
an investment company within the meaning of the Investment Company
Act. The most common forms of municipal fund securities sold by
dealers consist of interests in trusts established by states as
qualified tuition programs under Section 529 of the Internal Revenue
Code of 1986, as amended (``529 college savings plans''), and
interests in local government investment pools (``LGIPs''). \4\ 15 U.S.C. 77a et seq.
General Disclosures
The proposed rule change includes in clauses (A) and (B) of Rule G
21(e)(i) disclosure provisions modeled after SEC general disclosure requirements for mutual fund advertisements, with certain
modifications. The modifications recognize the difference between the
prospectus required for mutual funds and the official statement
indirectly required for municipal fund securities under Rule 15c212
adopted by the SEC under the Act,\5\ as well as other differences in
characteristics between municipal fund securities and mutual funds.
\5\ SEC Rule 15c212 provides, among other things, that the
underwriter for most primary offerings of municipal securities must
obtain and review the issuer's nearfinal official statement before
purchasing or offering the securities, contract with the issuer to
receive copies of the final official statement within specified time frames after the final agreement to purchase or offer the
securities, and distribute copies of the official statement to
potential customers upon request. For purposes of the rule, a final
official statement must set forth information concerning the terms
of the issue; information, including financial or operating data,
concerning the issuer and other entities, enterprises, funds,
accounts and other persons material to an evaluation of the
offering; and a description of undertakings regarding the provision
of secondary market information, as well as disclosure of any
failures to provide such information during the past five years. A
final official statement need not contain each item of information
required to be included in a prospectus under the Securities Act.
New section (e)(i)(A) of Rule G21 requires that all dealer advertisements relating to municipal fund securities include generalized disclosure that: (1) Advises investors to consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing; (2) explains that more information about municipal fund securities is available in the issuer's official statement; (3) if the advertisement identifies a source from which an investor may obtain an official statement and the dealer that publishes the advertisement is the underwriter for the municipal fund securities for which such official statement may be supplied, states that such dealer is the underwriter for such municipal fund securities; and (4) states that the official statement should be read carefully before investing. The disclosures required in clauses (1), (2), and (4) of Rule G21(e)(i)(A) are substantially similar to the analogous disclosures required under section (b)(1)(i) of SEC Rule 482 in connection with a mutual fund advertisement that would be considered a prospectus under the Securities Act. The disclosure required in clause (3) of Rule G21(e)(i)(A) is substantially similar to the analogous disclosure required under section (b) of Rule 135a adopted by the SEC under the Securities Act in connection with generic mutual fund advertisements.
New section (e)(i)(B) of Rule G21 requires that all dealer advertisements that refer by name (including marketing name) to any municipal fund security, issuer of municipal fund securities, governmental entity that sponsors the issuance of municipal fund securities, or to any securities held as assets of municipal fund securities or to any issuer of such securities held as assets, must include additional disclosure that: (1) Identifies a source from which an investor may obtain an official statement; (2) if the advertisement relates to municipal fund securities issued through a 529 college savings plan, advises an investor to consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 college savings plan; and (3) if the advertisement is for a municipal fund security that the issuer holds out as having the characteristics of a money market fund, states that an investment in the security is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency (unless such guarantee is provided by or on behalf of such issuer) and that, if the security is held out as maintaining a stable net asset value, although the issuer seeks to preserve the value of the investment at a fixed share price, it is possible to lose money by investing in the security. The disclosure required in clause (1) of Rule G21(e)(i)(B) is substantially similar to the analogous disclosure required under section (b)(1)(i) of SEC Rule 482. The disclosure required in clause (3) of Rule G21(e)(i)(B) is substantially similar to the analogous disclosure required under section (b)(4) of SEC Rule 482. The disclosure required in clause (2) of Rule G21(e)(i)(B) is not derived from SEC mutual fund advertising rules but is analogous to the point ofsale disclosure obligation under Rule G17 described in the 2002 Notice.\6\
New section (e)(i)(D) of Rule G21 requires that these general
disclosures be presented in the same format required under SEC Rule 482.
\6\ The specific disclosure required in the proposed rule change
is somewhat broader than that currently required under the pointof
sale disclosure obligation described in the 2002 Notice. The MSRB
expects to file with the SEC in the near future a proposed rule
change that expands this pointofsale disclosure requirement under
Rule G17 to also reference the possible existence of other nontax state benefits. See MSRB Notice 200416 (June 10, 2004).
Historical Performance Data
The proposed rule change establishes in new section (e)(ii) of Rule G21 specific requirements with respect to the inclusion of performance data in municipal fund security advertisements.
Calculation and Display of Performance Data. Under the proposed
rule change, such advertisements must comply with the method of
computing and displaying performance data for mutual funds as
prescribed in section (d) or (e) of SEC Rule 482, with certain
modifications described below. In effect, for municipal fund securities
other than those that are held out by the issuer as having the
characteristics of a money market fund, quotations of performance in an
advertisement are limited to the average annual total return, current
yield (but only if accompanied by average annual total return), tax
equivalent yield (but only if accompanied by average annual total
return and current yield), aftertax return (but only if accompanied by
average annual total return), or other nonprescribed performance
measures (but only if accompanied by average annual total return and,
if adjusted to reflect the effects of taxes, aftertax return), as
provided in SEC Rule 482(d). In the case of municipal fund securities
that are held out by the issuer as having the characteristics of a
money market fund, quotations of performance in an advertisement are
limited to the current yield, effective yield (but only if accompanied
by current yield), taxequivalent yield or taxequivalent effective
yield (but only if accompanied by current yield), or total return (but
only if accompanied by current yield), as provided in SEC Rule 482(e).\7\
\7\ SEC Rule 482 incorporates the calculation methods set forth
in Forms N1, N3, and N4 for purposes of calculating the various
types of quotations described in the rule. These methods are also incorporated into Rule G21(e)(ii).
[[Page 78503]]
Clauses (A) through (E) of Rule G21(e)(ii) modify the basic
performance data calculation methods established for mutual funds to
reflect the fact that certain items of information that exist in the
mutual fund industrysuch as the registration statement and the
specific items of information required to be disclosed in the
prospectus and statement of additional informationdo not exist for
municipal fund securities, as well as to reflect other differences in
characteristics between municipal fund securities and mutual funds.
Thus, Rule G21(e)(ii) provides that: (A) A dealer can use information
provided in the issuer's official statement, otherwise made available
by the issuer, or otherwise obtained from other reliable sources to
calculate performance to the extent such information is not available
from a balance sheet in a registration statement or from a prospectus;
(B) the life of a municipal fund securities issue should be measured
from when the issuer first issues the securities; (C) performance data
in advertisements must be calculated as of the most recent calendar
quarter ended prior to the submission of the advertisement for
publication for which such performance data, or all information
required for the calculation of such performance data, is available to
the dealer; \8\ (D) expenses having the same characteristics as those
permitted to be paid under Rule 12b1 adopted by the SEC under the
Investment Company Act but not technically accrued under a 12b1 plan
must be treated as 12b1 expenses for purposes of calculating
performance; \9\ and (E) in calculating taxequivalent yields or after
tax returns, the dealer shall assume that any unreinvested
distributions are used in a manner that qualifies for any federal tax
exemption or other federally taxadvantaged treatment with respect to
such distributions, provided that: (1) The advertisement also provides
a general description of how federal law intends such distributions be
used and discloses that such yield or return would be lower if
distributions are not used in this manner; and (2) if the federal
income tax treatment upon which such yield or return is based is
subject to lapse or other adverse change without extension or change of
federal law, the advertisement must disclose this fact and that such
yield or return would be lower if the Federal income tax treatment is not extended or otherwise changed.
\8\ As noted in footnote 17 and accompanying text, infra, the
MSRB is publishing for comment concurrent with this filing a draft amendment that would modify this clause (C).
\9\ Thus, assetbased charges paid to the program manager or
investment advisor, to the issuer or its agents, or to any other
party generally are to be treated as 12b1 expenses for purposes of
calculating performance even if any such charges may not technically
be paid under a formal 12b1 plan. In addition, any 12b1 expenses
incurred in connection with underlying assets of the municipal fund
securities also must be treated as 12b1 expenses of the municipal
fund securities to the extent that such expenses are not waived or
not included within the assetbased charges described in the preceding sentence.
Performance data included in municipal fund security advertisements are required to be displayed in the manner provided in section (d) or (e) of SEC Rule 482, as appropriate, with respect to prominence and positioning of information.
Disclosures Accompanying Performance Data. New Section (e)(i)(C) of Rule G21 requires that advertisements that include performance data for municipal fund securities also include certain related legends and disclosures modeled after those required under SEC Rule 482 for mutual funds advertisements that display performance information. These disclosures emphasize that the performance data is historical and does not guarantee future results, that the value of holdings is subject to fluctuation (except where the municipal fund security is held out as having the characteristics of a money market fund and as maintaining a stable net asset value), and that current performance may be different from the performance data included in the advertisement.\10\ Advertisements containing performance data also are required to include the maximum amount of any sales load or other nonrecurring fee and, if such load or fee is not reflected in the performance data, to disclose that the load or fee is not so reflected and that performance would be lower if it had been reflected. These nonrecurring fees that are subject to disclosure include such fees imposed not only by the dealer but also by the issuer or any other party to the issuance of the municipal fund securities or the maintenance of investments therein. \10\ As noted in footnote 17 and accompanying text, infra, the MSRB is publishing for comment concurrent with this filing a draft amendment that would modify this provision.
New Section (e)(i)(D) requires that these legends and disclosures be presented in the same format required under SEC Rule 482. Additional Requirements
The proposed rule change includes in new paragraphs (iii) through (vi) of Rule G21(e) additional requirements with respect to municipal fund security advertisements, based largely on interpretive guidance provided in the 2002 Notice.
Nature of Issuer and Security. New paragraph (iii) requires that an advertisement: (1) for a specific municipal fund security provide sufficient information to identify the security in a manner that is not false or misleading; (2) that identifies a specific municipal fund security include the name of the issuer (or its marketing name, including state), presented in a manner no less prominent than any other entity identified in the advertisement, and not imply that a different entity is the issuer; (3) not raise an inference that, because municipal fund securities are issued under a government sponsored plan, investors are guaranteed against investment losses if no such guarantee exists; and (4) that concerns a specific class or category of municipal fund securities (e.g., A shares versus B shares; direct sale shares versus advisor shares; instate shares versus national shares; etc.) clearly disclose this fact in a manner no less prominent than the information provided with respect to such class or category.
Capacity of Dealer and Other Parties. New paragraph (iv) requires an advertisement about services provided with respect to municipal fund securities to clearly indicate the entity providing such services. If any person or entity other than the dealer is named in the advertisement, it must reflect any relationship between the dealer and such other person or entity. An advertisement soliciting purchases that would be effected by any party other than the dealer that publishes the advertisement (i.e., the issuer or another dealer) must identify which entity would effect the transaction, provided that it may identify one or more such entities in general descriptive terms but must specifically name any such other entity if it is the issuer, an affiliate of the issuer, or an affiliate of the dealer that publishes the advertisement.
Tax Consequences and Other Features. New paragraph (v) requires
that any discussion of tax implications or other benefits or features
of investments in municipal fund securities included in an
advertisement not be false or misleading. If an advertisement includes
statements regarding tax or other benefits offered in connection with
such municipal fund securities or otherwise offered under state or
federal law, it must also state that the availability of such tax or
other benefits may be conditioned on meeting certain requirements. If
the advertisement describes the nature of specific benefits, such
advertisement must also briefly name the factors that may materially limit the availability of
[[Page 78504]]
such benefits (such as residency, purpose for or timing of
distributions, or other factors, as applicable).\11\ Such statements of
conditions or limitations must be presented in close proximity to, and
in a manner no less prominent than, the description of such benefits.
\11\ For example, if an advertisement notes that investors in a
particular 529 college savings plan may qualify for scholarships or
matching grants, it may also need to state that such scholarships or
matching grants are available only for attendance at instate
colleges or to instate investors, if that is in fact the case.
Underlying Registered Securities. New paragraph (vi) requires that, if an advertisement for a municipal fund security provides specific details of a security held as an underlying asset of the municipal fund security, the details included in the advertisement relating to such underlying security be presented in a manner that would be in compliance with any SEC or NASD advertising rules that would be applicable if the advertisement related solely to such underlying security. Details of the underlying security included in the advertisement must be accompanied by any further statements necessary to ensure that the inclusion of such details does not cause the advertisement to be false or misleading with respect to the municipal fund securities advertised. This provision does not limit the applicability of any rule of the SEC, NASD or any other regulatory body relating to advertisements of securities other than municipal fund securities, including advertisements that contain information about such other securities together with information about municipal fund securities.
Exemption From New Issue Price/Yield Requirement
The proposed rule change exempts municipal fund security advertisements from the provision of Rule G21(d) relating to advertisements of initial reoffering prices or yields of new issue municipal securities. This provision is designed for advertisements by underwriting syndicates for municipal debt offerings and does not deal with matters relevant to municipal fund securities.
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
section 15B(b)(2)(C) of the Act,\12\ which requires that the rules of
the MSRB 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* * *.\13\
\12\ 15 U.S.C. 78o4(b)(2)(C).
\13\ Id.
The MSRB believes that the proposed rule change is consistent with
the Act because it will further investor protection by raising the
standards for advertisements of municipal fund securities and by making
information provided in such advertisements comparable for different
municipal fund securities investments and between municipal fund securities and registered mutual funds.
B. SelfRegulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change will impose 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. SelfRegulatory 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 rule changes
to Rule G21 with respect to advertisements of municipal fund
securities.\14\ The MSRB received eight comment letters.\15\ After
reviewing these comments, the MSRB approved the draft amendments, with
certain modifications, for filing with the SEC. The comments and modifications to the draft amendments are discussed below.
\14\ See MSRB Notice 200416 (June 10, 2004).
\15\ Letter from Kenneth B. Roberts, Hawkins Delafield & Wood
LLP (``Hawkins''), to Ernesto A. Lanza, Senior Associate General
Counsel, MSRB, dated August 20, 2004; letter from Mary L. Schapiro,
Vice Chairman, NASD, and President, Regulatory Policy and Oversight,
to Ernesto A. Lanza, dated September 9, 2004; letter from Tamara K.
Salmon, Senior Associate Counsel, Investment Company Institute
(``ICI''), to Ernesto A. Lanza, dated September 10, 2004; letter
from David J. Pearlman, College Savings Foundation (``CSF''), to
Ernesto A. Lanza, dated September 13, 2004; letter from Elizabeth L.
Bordowitz, General Counsel, Finance Authority of Maine (``FAME''),
to Ernesto A. Lanza, dated September 13, 2004; letter from Diana F.
Cantor, Chair, College Savings Plan Network (``CSPN''), and
Executive Director, Virginia College Savings Plan, to Ernesto A.
Lanza, dated September 15, 2004; letter from Elizabeth Varley and
Michael D. Udoff, CoStaff Advisers, Securities Industry Association
(``SIA'') Ad Hoc 529 Plans Committee, to Ernesto A. Lanza, dated
September 15, 2004; and letter from Raquel Alexander, PhD, Assistant
Professor, and LeAnn Luna, PhD, Assistant Professor, University of
North Carolina at Wilmington, to Ernesto A. Lanza, dated September
15, 2004. Most commentators also provided comments on the proposed
modification to the MSRB's existing pointofsale disclosure
obligation relating to sales of outofstate 529 college savings
plans, as described in the June notice. The MSRB expects to file
with the SEC in the near future a proposed rule change that expands
this pointofsale disclosure requirement under Rule G17 to also
reference the possible existence of other nontax state benefits.
The MSRB will address comments on this subject at that time. General Disclosures
Summary of Draft Amendment. Draft Rule G21(e)(i)(A) would require dealer advertisements of municipal fund securities to include generalized disclosure to the effect that investors should consider the securities' investment objectives, risks and charges before investing; that more information about the securities is available in the issuer's official statement; identifies where an official statement can be obtained; and states that the official statement should be read carefully before investing. Advertisements of 529 college savings plans also must advise investors to consider whether their home states offer state tax or other benefits only available for investments in the in state plans. Further, advertisements for municipal fund securities that are marketed as money market securities would be required to disclose that investments are not insured and, if marketed as maintaining a stable net asset value, it is still possible to lose money. These disclosures would be required to be given emphasis equal to that used in the major portion of the advertisement. In addition, the MSRB sought comment on whether the rule should require that dealers that advertise 529 college savings plans include in their generalized disclosure language the URL of an MSRBmaintained Web site where investors can obtain general information about the 529 college savings plan market.
Discussion of Comments. Commentators generally supported the proposed general disclosures, with several providing suggested changes.
[[Page 78505]]
distributed solely within such state, the advertisement should be exempted from the proposed disclosure regarding potential benefits of investing in an instate plan.
The MSRB agrees that the general disclosure language in Rule G 21(e)(i)(B)(2) should be modified to include reference to the designated beneficiary when discussing the benefits of instate investments. However, the MSRB does not believe that the additional changes suggested by the commentators should be made. The MSRB believes that disclosure of potential instate benefits should apply to all 529 college savings plan advertisements, even if the advertisement for a 529 college savings plan offered solely within a particular state is distributed solely within that state, as this would ensure uniform practices and avoid sometimes difficult factual determinations.
The MSRB notes that SEC Rule 135a effectively permits the use of certain types of mutual fund advertisements containing very limited information without including the disclosures required under SEC Rule 482. SEC Rule 135a covers advertisements that include no more than explanatory information relating to mutual funds generally and/or to specific categories of mutual funds, as well as an invitation to inquire for further information. Such advertisements must contain the name and address of the dealer sponsoring the advertisement and whether the dealer is the principal underwriter of any mutual fund with respect to which information will be sent to any investor who asks for more information. However, such advertisements must not specifically refer by name to any mutual fund or fund family.
The suggestion of CSF and SIA would provide for including the name of the 529 college savings plan and its sponsoring state, unlike under SEC Rule 135a. However, their proposal would provide for retaining certain of the general disclosures of the proposal that are not otherwise required under SEC Rule 135a. The MSRB believes that the general disclosure provision should be modified to permit more abbreviated general disclosures, set forth in Rule G21(e)(i)(A), where an advertisement does not refer by name (including marketing name) to any specific municipal fund security, issuer of municipal fund securities or state or other governmental entity that sponsors the issuance of municipal fund securities, or to any securities held as assets of municipal fund securities or to any issuer of such securities held as assets. Such disclosures would be limited to statements advising investors to consider the investment objectives, risks and charges of municipal fund securities before investing; that more information about municipal fund securities is available in the issuer's official statement; and that the official statement should be read carefully before investing. Because these disclosures would be considerably shorter than otherwise required, the MSRB does not believe that the equal prominence requirement for such statements should be changed. Further, the MSRB does not believe that dealers should be permitted to identify a specific product in advertisements where only these more abbreviated general disclosures are provided. Any advertisement that specifically identifies a product must also include the general disclosures set forth in Rule G21(e)(i)(B), as applicable.
advertisements include reference to an MSRBmaintained Web site on 529 college savings plans, and no commentator supported such a requirement. The MSRB will take no further action with respect to such proposal at this time. However, the MSRB will continue to maintain and update its existing Web pages, at http://www.msrb.org/msrb1/mfs, that provide generalized information about municipal fund securities.
Performance Data
Summary of Proposal. Draft Rule G21(e)(ii) would require advertisements that include performance data to comply with the method of computing and displaying mutual fund performance data provided under SEC Rule 482, with certain modifications. Among other things, the draft amendment would require that performance data shown in an advertisement be calculated as of the most recent calendar quarter for which such data, or all information required to calculate such performance data, is reasonably available to the dealer. SEC Rule 482 requires that such data be shown in mutual fund advertisements as of the most recent calendar quarter but does not make the determination of which calendar quarter is the most recent dependent upon the availability of such data.
In addition, draft Rule G21(e)(i) would require certain related disclosures for municipal fund securities advertisements that contain performance data. The disclosures emphasize that the performance information is historical and does not guarantee future results, the value of holdings is subject to fluctuation, and current performance may be lower or higher than the performance quoted. Advertisements containing performance data also would be required to include basic information about sales loads and other nonrecurring fees and note the impact of such loads or fees on performance as shown. The disclosures must be given emphasis equal to that of the performance data itself. These disclosures are required under SEC Rule 482 in mutual funds advertisements that display performance information.
Discussion of Comments. Commentators generally supported the
proposed performance data calculation methods and related legends and [[Page 78506]]
disclosures, with several providing suggested changes.
The language used in the draft amendment was not designed to give
dealers latitude in deciding which timeframes to include in
advertisements, nor would it normally lead to a different result under
the draft rule as compared to SEC Rule 482.\16\ Rather, the language
reflects the MSRB's recognition that its rulemaking should not be used
to indirectly regulate state issuers in structuring their programs and
that a state's structure might result in making compliance with the
specific language of Rule 482 impossible without forcing a change in
the structure. However, to mitigate the possibility of unintended
ambiguity and possible inconsistent application of the rule between
different dealers, the MSRB has modified the language of Rule G
21(e)(ii)(C) to provide that calculations must be made as of the most
recent quarter for which necessary information is available, rather
than when such information is reasonably available. Dealers wishing to
advertise performance would be tasked with taking all appropriate
actions necessary to obtain information that is in fact available for purposes of such calculation.
\16\ The MSRB notes that SEC Rule 482(g) provides a basic
timeliness standard based on the ``most recent practicable date
considering the type of investment company and the media through
which data will be conveyed'' that also could be viewed as giving some latitude in deciding which timeframes to include in
advertisements.
\17\ See MSRB Notice 200443 (December 16, 2004).
The MSRB does not believe that such assumptions about the tax exempt nature of 529 college savings plan investments should apply for all purposes of calculating performance. Thus, the baseline total return calculation would continue to ignore all tax effects. However, in calculating taxequivalent yields or aftertax returns, the MSRB believes it is appropriate to assume that unreinvested distributions are used for purposes that would maintain any intended federal tax benefit, as set forth in Rule G21(e)(ii)(E). Such assumption would require that the advertisement include a general description of how federal law intends that such distributions be used to maintain the favorable tax treatment and a disclosure that the taxequivalent yield or aftertax return would be lower if distributions are not used in such manner. In addition, if the favorable tax treatment is subject to lapse or other adverse change without extension or other change of law, the advertisement must disclose this fact and that such yield or return would be lower if the favorable tax treatment is not extended or otherwise changed.
Further, the MSRB does not believe that the provision requiring the inclusion of after taxreturn should be eliminated. The only circumstance in which a dealer would be required to show aftertax return is if the advertisement also includes a performance measure that is adjusted to reflect the effect of taxes (e.g., a tax equivalent return intended to show how the tax benefits of investing in 529 college savings plans compares to other fully taxable investments). Under this circumstance, it is appropriate that the advertisement also include performance that does not include such adjustment.
Additional Requirements
Draft Rule G21 would incorporate, with certain modifications,
several existing interpretive positions from the 2002 Notice.
Commentators generally supported the incorporation of these positions into the rule, with several providing suggested changes.
CSF argued that, in some cases, providing the name of the legal
issuer in connection with 529 college savings plan securities may not
help consumers understand the nature of the issuer and may result in
confusion since the legal issuer may be an obscure state trust. CSF
suggested that it would be more helpful to identify the 529 college
savings plan by marketing name, together with the name of the state
that establishes and maintains the plan. CSF also suggested that
dealers be permitted to include the marketing logo, rather than a logo
of the legal issuer, in advertisements, which logo should appear at
least as prominently as the dealer's logo. SIA stated that the
requirement that the issuer's name be given equal prominence to that of
the dealer is unnecessary and subject to second guessing. SIA argued
that the policy objective of the proposed rule, which is to prevent investor confusion
[[Page 78507]]
as to who the issuer of the security is, is satisfied by the other
requirements set forth in this section that the issuer be identified
and that the advertisement not imply that another entity is the issuer of the security.
The MSRB believes that it is appropriate to permit dealers to use
the marketing name and state of a 529 college savings plan in
substitution for the legal name of the issuer. However, the MSRB does
not agree that such issuer information should be permitted to be
presented in a manner that is less prominent than any other entity
identified in the advertisement. This provision would also permit the
use of the 529 college savings plans logo, so long as such logo is
presented in a manner no less prominent than any other entity's logo included in the advertisement.
CSF and SIA argued that many 529 college savings plans are marketed through hundreds of dealers and it would be extremely difficult if not impossible for a primary distributor to list in its advertisement all such dealers. CSF suggested that only dealers that are affiliates of the dealer publishing the advertisement and, if applicable, the issuer itself be required to be identified by name in such advertisements. NASD stated that this provision resembles, but is not identical to, NASD Rule 2210(d)(2)(C), which generally requires that all sales material prominently disclose the name of the member and, if it includes other names, reflect which products or services are being offered by the member.
It was not the intent of the original proposal to require that a
primary distributor list its many hundreds of selling dealers used in
the 529 college savings plan's distribution channels. The MSRB has
modified this provision so that the only parties effecting transactions
in municipal fund securities that must be specifically named in an
advertisement are the dealer publishing the advertisement, any other
dealer affiliated with such dealer and the issuer, as applicable. In
addition, the rule language has been revised to more closely track the
NASD requirement that, if any parties other than the dealer is named in
a municipal fund securities advertisement, the products or services
offered by such parties in connection with such municipal fund securities must be stated.
CSF argued that state tax treatment of 529 college savings plans is extremely complex and that not all variations in state treatment will be a benefit to instate investors. It suggested that the reference in the rule language to ``state tax or other benefits'' should be changed to ``different state tax or other consequences.'' CSF also expressed concern over the proposal's requirement that an advertisement that includes information about tax or other state benefits must ``make clear the nature of such benefits.'' CSF stated:
If all that would be required is a general statement that tax and other benefits may be available only through the homestate program, the guidance should so state. . . . If a laundry list of all potential aspects of differing treatment is required, we are concerned that such a list could not practically be updated to account for all new state laws, and that even if it could, space limitations would make it impractical or impossible to achieve compliance.
CSPN and Hawkins stated that only general statements of limitation are appropriate where an advertisement contains only general statements of benefits, so long as the investor is directed to the official statement for additional information. Hawkins suggested that the proposed rule language appears to require dealer advertisements that refer in any manner to tax or other benefits to include a detailed description of the nature of, and of limitations applicable to receipt of, such benefits. Hawkins argued that it may be impractical to include such a detailed description within most advertisements without resulting in potentially misleading or incomplete statements.
FAME suggested certain changes to terminology in this provision, stating that references to ``shares'' are not appropriate for many 529 college savings plans. In addition, CSPN and FAME stated that some state benefits may not be specifically provided for under state law but are created by state entities under general grants of authority.
The MSRB has modified the rule language to more narrowly focus the types of disclosures that would be required to be made in an advertisement that includes descriptions of tax or other beneficial features offered under state or federal law in connection with an investment in municipal fund securities. Thus, the modified language would make clear that general statements regarding the existence of beneficial features would not require an extensive listing of all such features but would require general disclosure that such features may be subject to limitations. However, as the information about tax matters becomes more detailed, the rule would require comparably detailed discussion of potential limitations. However, the reference to ``benefits'' has not been eliminated from the rule. The rule already addresses the broader concept of ``tax implications'' but is also specifically aimed at ensuring that the ``hyping'' of beneficial treatment is tempered by an equally prominent discussion of potential limitations. Further, certain limited modifications have been made to the rule language to address the concerns regarding use of the term ``shares'' and reference to benefits provided under state law. 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 the first calendar day of the month beginning 90 or more calendar days after SEC 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 selfregulatory 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.
[[Page 78508]]
IV. Solicitation of Comments
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
Paper Comments
All submissions should refer to File Number SRMSRB200409. This
file number should be included on the subject line if email 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 (
© 2009 theFederalRegister.com
Created by: Craig Wood | styleshout |
Congressional Record
Home |
RSS Feed