MSRB NOTICE 2002-19 (MAY 14, 2002)

APPLICATION OF FAIR PRACTICE AND ADVERTISING RULES TO MUNICIPAL FUND SECURITIES

The Municipal Securities Rulemaking Board (“MSRB”) is aware that the market for municipal fund securities continues to evolve rapidly, particularly with respect to the so-called Section 529 college savings plan market.[1]  Many brokers, dealers and municipal securities dealers (“dealers”) active in the market for municipal fund securities have no other experience effecting municipal securities transactions and therefore may not be familiar with the rules of the MSRB.  Further, even where a dealer has a sound understanding of MSRB rules derived from its other municipal securities activities relating to traditional debt securities, the unique nature of municipal fund securities may result in these otherwise familiar rules being applied in unfamiliar ways.  As a result, the MSRB has been committed to providing interpretive guidance regarding the application of its rules to dealers effecting transactions in municipal fund securities as the MSRB becomes aware of issues where such guidance would be beneficial.[2]

This notice seeks to provide guidance on the basic customer protection obligations that dealers have when effecting transactions in municipal fund securities.  At the core of the MSRB’s customer protection rules is Rule G-17, which provides that, in the conduct of its municipal securities activities, each dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest or unfair practice.  As the MSRB has recently noted, the rule encompasses two basic principles:  an anti-fraud prohibition similar to the standard set forth in Rule 10b-5 adopted by the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”), and a general duty to deal fairly even in the absence of fraud.[3]  All activities of dealers must be viewed in light of these basic principles, regardless of whether other MSRB rules establish specific requirements applicable to such activities.

Sales Practice Issues

Dealers must keep in mind the requirements under Rule G-17 – that they deal fairly with all persons and that they not engage in any deceptive, dishonest or unfair practice – when considering the appropriateness of day-to-day sales practices with respect to municipal fund securities.  In some cases, certain sales-related activities are governed in part by specific MSRB rules, such as Rule G-19, relating to suitability of recommendations and transactions, Rule G-21, on advertising, and Rule G-30, on prices and commissions.[4]  Other activities may not be explicitly addressed by a specific MSRB rule.  In either case, the general principles of Rule G-17 always apply.

The MSRB has previously described its approach to dealer regulation in the context of a market in which issuer activities are largely unregulated.  In establishing the MSRB, Congress determined that dealer regulation was the appropriate manner of providing investor protection in the municipal securities market while maintaining the existing exemption for issuers.  Consistent with this Congressional purpose, the MSRB’s rules are designed to recognize that issuers, as largely unregulated entities, may act in their best judgment in widely divergent manners.  The MSRB observes that municipal fund securities are, in many respects, similar but not identical to registered investment company securities.  Thus, the MSRB has crafted its rules so that the obligations placed on dealers are sufficiently flexible to permit dealers to act in a lawful manner in view of this wide divergence of circumstances and structures while maintaining an appropriate level of customer protection.  In many cases, the MSRB has determined that its existing rules, with some minor modifications, operate effectively in the context of municipal fund securities.  In other cases, the MSRB has modified its existing rules to operate consistently with rules applicable to registered investment company securities, where this was found to be appropriate.  The MSRB notes, however, that certain rules of the SEC and the National Association of Securities Dealers, Inc. (“NASD”) applicable to registered investment companies and their securities are specifically authorized by the Investment Company Act, which does not apply to municipal fund securities.  In these cases, the MSRB may have more circumscribed authority to emulate such SEC and NASD rules, even if the MSRB were to determine that such emulation would be appropriate.

The MSRB remains committed to this rulemaking approach.[5]

Suitability of Recommended Transactions . Under Rule G-19, a dealer that recommends to a customer a transaction in a municipal fund security must have reasonable grounds for believing that the recommendation is suitable, based upon information available from the issuer of the security or otherwise and the facts disclosed by or otherwise known about the customer.  To assure that a dealer effecting a recommended transaction with a non-institutional customer has the information needed about the customer to make its suitability determination, the rule requires the dealer to make reasonable efforts to obtain information concerning the customer’s financial status, tax status and investment objectives, as well as any other information reasonable and necessary in making the recommendation.

In the context of a recommended transaction relating to a Section 529 college savings plan, the MSRB believes that it is crucial for dealers to remain cognizant of the fact that these securities are designed for a particular purpose and that this purpose generally should match the customer’s investment objective.  For example, dealers should bear in mind the potential tax consequences of a customer making an investment in a Section 529 college savings plan where the dealer understands that the customer’s investment objective may not involve use of such funds for qualified higher education expenses.[6]  Furthermore, investors generally are required to designate a specific beneficiary under a Section 529 college savings plan.  The MSRB believes that information known about the designated beneficiary generally would be relevant in weighing the investment objectives of the customer, including (among other things) information regarding the age of the beneficiary and the number of years until funds will be needed to pay qualified higher education expenses of the beneficiary.  The MSRB notes that, since the person making the investment in a Section 529 college savings plan retains significant control over the investment (e.g., may withdraw funds, change plans, or change beneficiary, etc.), this person is appropriately considered the customer for purposes of Rule G-19 and other MSRB rules.  As noted above, information regarding the designated beneficiary should be treated as information relating to the customer’s investment objective for purposes of Rule G-19.

In many cases, dealers may offer the same municipal fund security of an issuer sold with different commission structures.  For example, an A share may have a front-end load, a B share may have a contingent deferred sales charge or back-end load that reduces in amount depending upon the number of years that the investment is held, and a C share may have an annual asset-based charge.  A customer’s investment objective – particularly, the number of years until withdrawals are expected to be made – can be a significant factor in determining which share class would be suitable for the particular customer.

Rule G-19(e), on churning, prohibits a dealer from recommending transactions to a customer that are excessive in size or frequency, in view of information known to such dealer concerning the customer’s financial background, tax status and investment objectives.  Thus, for example, where the dealer knows that a customer is investing in a Section 529 college savings plan with the intention of receiving the available federal tax benefit, such dealer could, depending upon the facts and circumstances, violate rule G-19(e) if it were to recommend roll-overs from one Section 529 college savings plan to another with such frequency as to lose the federal tax benefit.  Even where the frequency does not imperil the federal tax benefit, roll-overs recommended year after year by a dealer could, depending upon the facts and circumstances (including consideration of legitimate investment and other purposes), be viewed as churning.   Similarly, depending upon the facts and circumstances, where a dealer recommends investments in one or more plans for a single beneficiary in amounts that far exceed the amount that could reasonably be used by such beneficiary to pay for qualified higher education expenses, a violation of rule G-19(e) could result.[7]

Marketing Activities . No MSRB rule explicitly governs the manner in which marketing activities are structured.  However, dealers must remain aware of the applicability of the general principles of Rule G-17 to their marketing activities.  In particular, dealers must ensure that they do not engage in transactions primarily designed to increase commission revenues in a manner that is unfair to customers under Rule G-17.  Thus, in addition to being a potential violation of Rule G-19 as discussed above, recommending a particular share class to a customer that is not suitable for that customer, or engaging in churning, may also constitute a violation of Rule G-17 if the recommendation was made for the purpose of generating higher commission revenues.  Further, recommending transactions to customers in amounts designed to avoid commission discounts (i.e., sales below breakpoints where the customer would be entitled to lower commission charges) may also violate Rule G-17, depending upon the facts and circumstances.  For example, a recommendation that a customer invest in two separate but nearly identical municipal fund securities for the purposes of avoiding a reduced commission rate that would be available upon purchasing a larger quantity of a single such security, or that a customer time his or her multiple investments in a municipal fund security so as to avoid being able to take advantage of a lower commission rate, in either case without a legitimate investment-based purpose, could violate Rule G-17.

With respect to sales contests, the MSRB has previously interpreted Rule G-20, relating to gifts and gratuities, to require a dealer that sponsors a sales contest involving representatives who are not employed by the sponsoring dealer to have in place written agreements with these representatives.[8]  The MSRB otherwise does not mandate specific requirements with respect to sales contests, but the general principles of Rule G-17 are applicable.  Thus, if a dealer or any of its associated persons engages in any marketing activities that result in a customer being treated unfairly, or if the dealer or any of its associated persons engages in any deceptive, dishonest or unfair practice in connection with such marketing activities, Rule G-17 could be violated.  The MSRB believes that, depending upon the specific facts and circumstances, a dealer may violate Rule G-17 if it acts in a manner that is reasonably likely to induce another dealer or such other dealer’s associated persons to violate the principles of Rule G-17 or other MSRB customer protection rules, such as Rule G-19 or Rule G-30.

Advertising . Dealer advertisements of municipal fund securities are not subject to the requirements of NASD Rule 2210.  Rather, as is the case with any other dealer advertisement of a municipal security, advertisements of municipal fund securities are governed by MSRB Rule G-21.[9]  Rule G-21 establishes a general ethical standard for dealer advertisements[10] rather than a detailed code of required elements and specific prohibitions.  Under the rule, a dealer is prohibited from publishing any advertisement concerning its facilities, services or skills with respect to municipal securities that is materially false or misleading.  In addition, a dealer is prohibited from publishing any advertisement concerning municipal securities that it knows or has reason to know is materially false or misleading.[11]  Rule G-21 generally does not require that any specific statements or information be included in an advertisement but does require that any statement or information that is included not be materially false or misleading.[12]

The MSRB previously has stated that, although dealers are not required to comply with NASD Rule 2210 in connection with their advertisements of municipal fund securities, an advertisement that would be compliant with the NASD rule (if the securities were registered investment company securities) also would be in compliance with Rule G-21.  Similarly, a dealer advertisement of municipal fund securities that would be compliant with the SEC’s Rules 156 and 482 under the Securities Act of 1933 also would be in compliance with Rule G-21.[13]  Of course, a dealer advertisement of a municipal fund security that does not comply with every element of these NASD or SEC rules may still, depending upon the facts and circumstances, comply with Rule G-21 so long as the dealer does not know or has no reason to know that the advertisement is materially false or misleading and has otherwise complied with the MSRB’s interpretive guidance on advertising, including the guidance set forth below.

The MSRB also has stated that any use of historical yields in a municipal fund security advertisement typically would require a description of the nature and significance of the yield shown in the advertisement in order to assure that such advertisement is not false or misleading.  Further, depending upon the facts and circumstances, a dealer may be required to disclose information regarding a fee or other charge relating to municipal fund securities that may have a material effect on such advertised yield, to the extent that such disclosure is necessary to ensure that the advertisement is not materially false or misleading with respect to such yield.[14]

Rule G-21 does not provide for the filing of advertisements with the MSRB or any other regulatory agency.[15]  The MSRB observes that filing of registered investment company advertisements is mandated under Section 24(b) of the Investment Company Act, and the SEC has by rule authorized dealers to file advertisements with the NASD in order to meet this statutory requirement.  Of course, the Investment Company Act does not apply to municipal fund securities.  The MSRB believes that, given the nature of the issuers and the securities and the overall structure of the federal securities laws, it would not be appropriate at this time to require filing of municipal fund securities advertisements with the MSRB or any other regulatory agency.  However, all advertisements of municipal securities must be approved in writing by a municipal securities principal (which may include a municipal fund securities limited principal in the case of an advertisement relating to municipal fund securities) or a general securities principal prior to first use.  Dealers are required to maintain in a separate file records of all advertisements.  A copy of each advertisement is required to be preserved for a period of at least three years pursuant to Rule G-9(b)(xiii).

The MSRB provides below additional guidance to dealers on compliance with Rule G-21.  Since the MSRB understands that production and publication schedules and other technical issues may in some cases make immediate compliance with this additional guidance problematic, the MSRB has determined to delay the effectiveness of such guidance on advertising until July 15, 2002.  Nonetheless, the MSRB urges dealers to comply with this guidance as soon as practicable.

Historical data.  As previously noted, the use of historical yields in an advertisement requires a description of their nature and significance so as to assure that such advertisement is not false or misleading.  The MSRB believes that an advertisement that includes historical yield or other historical data must make clear that such information relates to past performance, which may not be indicative of future investment performance.

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.  For example, the MSRB believes that an advertisement of a particular municipal fund security that does not clearly disclose the identity of the issuer may, depending upon the facts and circumstances, be misleading, particularly since the identity of the issuer may be a relevant factor in determining the nature of certain tax and other features of the security.  Thus, an advertisement that identifies a specific municipal fund security but omits the name of the issuer generally would be misleading, as would an advertisement that implies that a different entity is the issuer of the municipal fund security (e.g., the dealer or the investment manager retained by the issuer to manage the underlying portfolio).  At the same time, a dealer must take care not to raise an inference that, because the securities are issued under a government-sponsored plan, an investor might expect that the governmental issuer would guarantee the investor against investment losses if no such guarantee in fact exists.  If the advertisement concerns a specific class of that issuer’s securities (e.g., A shares vs. B shares; direct sale shares vs. advisor shares; in-state shares vs. national shares; etc.), this also must clearly be disclosed.

Capacity of dealer and other parties.  The MSRB understands that in many cases a dealer serving as primary distributor for a municipal fund security program acts in such capacity in conjunction with certain of its affiliates or other unrelated entities that may provide investment management, transfer agent or other services to the issuer.  The MSRB believes that a dealer advertisement that relates to or describes services provided with respect to municipal fund securities must clearly indicate the entity providing those services.  Similarly, a dealer advertisement soliciting purchases of municipal fund securities that would in fact be effected by another dealer must clearly state which dealer would effect the sales.

Tax consequences.  Any discussion of tax implications of investments in municipal fund securities (e.g., exemption of earnings from federal income tax, deductibility of investments from state income tax, etc.) included in an advertisement must not be false or misleading.  In the case of an advertisement that includes statements regarding state tax exemption, the MSRB believes that the advertisement must make clear that the availability of such exemption may be limited based upon residency or other applicable factors.  Similarly, if an advertisement refers to exemption from federal income tax, it must make clear that such exemption is only available under certain defined circumstances.[16]

Underlying registered securities.  The MSRB recognizes that many municipal fund securities represent investments in pools of registered securities that are themselves subject to the various requirements of the SEC and NASD (e.g., registered investment company securities).  In some cases, an advertisement of a municipal fund security may provide specific details regarding underlying assets that are themselves subject to SEC and NASD advertising rules.  Under these circumstances, the MSRB believes that any details of a registered security that are included in the municipal fund security advertisement must be presented in a manner that would be in compliance with the SEC and NASD advertising rules applicable where the same registered security is sold directly to an investor.[17]  The MSRB takes this position because it believes that it could be unfair and possibly misleading to investors, in violation of Rules G-17 and G-21, for a dealer to advertise an underlying registered security in a manner that would make comparison with the features of the same registered security sold directly to investors difficult.

Disclosure Issues

Tax Treatment . The treatment of interest on municipal debt securities for federal income tax purposes traditionally has been an important feature for investors in such securities.  MSRB rules, however, only specifically provide for certain limited disclosures of tax treatment.  For example, MSRB Rule G-15(a)(i)(C)(4), relating to confirmation of customer transactions, requires confirmation disclosures relating to municipal debt securities that are taxable, subject to the federal alternative minimum tax or subject to special tax treatment as a result of original issue discount.  These limited disclosures are based in large measure on the generally well understood nature of the tax-exempt municipal bond market, where specific disclosures are needed only when the tax treatment diverges from the norms of the market.

On the other hand, the tax treatment of the emerging Section 529 college savings plan market has been in considerable flux.  In particular, various states have recently enacted or amended their own state tax provisions that may provide advantageous tax treatment for their residents if they invest in the Section 529 college savings plan sponsored by their home state.[18]  The Investment Company Institute (“ICI”) has requested that the MSRB adopt a requirement that would provide for written disclosure by dealers selling Section 529 college savings plan securities that an “investor’s home state may only offer favorable tax treatment for investing in a plan offered by such state.”[19]

The MSRB believes that Rule G-17 prohibits a dealer from misleading a customer regarding the availability of state tax benefits in connection with an investment in municipal fund securities.  For example, a dealer would violate Rule G-17 if it were to inform a customer that investment in the Section 529 college savings plan of the customer’s own state did not provide the customer with any state tax benefit when the dealer knows or has reason to know that such a state tax benefit likely would be available.  Furthermore, a dealer would violate Rule G-17 if it were to inform a customer that investment in the Section 529 college savings plan of another state would provide the customer with the same tax benefits as would be available if the customer were to invest in his or her own state’s plan, if the dealer knows or has reason to know that this is not the case.  Typically, however, the affirmative obligation arising under Rule G-17 to disclose material information regarding a particular transaction to a customer relates to material information about the securities that are the subject of the transaction rather than alternatives available in the market to such investment.

The MSRB believes that, in the case of sales to a customer of out-of-state Section 529 college savings plan interests, Rule G-17 requires a dealer to disclose that, depending upon the laws of the customer’s home state, favorable state tax treatment for investing in a Section 529 college savings plan may be limited to investments made in a Section 529 college savings plan offered by the customer’s home state.  Since dealers cannot reasonably be expected to become expert in state tax laws throughout the country, the MSRB believes that such disclosure, coupled with a suggestion that the customer consult a tax adviser about any state tax consequences of the investment, should adequately address the concerns expressed by the ICI.[20]

As the ICI noted, the MSRB has interpreted Rule G-32 to permit that certain required disclosures to new issue customers be made in the official statement, should the issuer choose to include such information.[21]  The MSRB believes that the disclosure obligation regarding the availability of favorable state tax treatment for sales of Section 529 college savings plan interests under Rule G-17 would be deemed to be met if such information is included in the official statement delivered to the customer, appearing in a manner reasonably likely to be noted by an investor.[22]  However, the MSRB has no authority to mandate inclusion of any particular items in the official statement.  Thus, if the issuer has not included this information regarding the availability of favorable state tax treatment in the official statement, the dealer would remain obligated to provide such information to the customer under Rule G-17.

As with its guidance on advertising set forth above, the MSRB has determined to delay the effectiveness of the disclosure obligation with respect to state tax consequences of investments in out-of-state Section 529 college savings plans until July 15, 2002.  Nonetheless, the MSRB urges dealers to comply with this guidance as soon as practicable.

Non-Material Amendments to Official Statement . The MSRB understands that an issuer may make minor modifications to the official statement in order to correct typographical or grammatical errors, or to make such other modifications that the issuer may deem to be immaterial.  If the issuer has acknowledged in writing to the primary distributor that it does not consider such modification to be material to investors and does not believe that such modification is required to make the statements in the official statement not misleading, then the modification need not be sent by a dealer to a customer that has previously received the official statement, notwithstanding the provisions of Rule G-32(a)(i).[23]  The primary distributor must maintain the issuer’s written acknowledgement under Rule G-8(a)(xiii), relating to records concerning deliveries of official statements.  The primary distributor must send all amendments, regardless of materiality, to the MSRB under Rule G-36.

* * * * *

Dealers are reminded that the guidance with respect to advertising and disclosure of state tax consequences of out-of-state investments becomes effective on July 15, 2002, although they are urged to come into compliance as soon as practicable.  The remaining guidance set out in this notice is effective immediately.  Questions regarding this notice should be directed to Ernesto A. Lanza, Senior Associate General Counsel, or Jill C. Finder, Assistant General Counsel.  The MSRB will continue to review its rules in the context of market practices relating to municipal fund securities, particularly the continuing evolution of the Section 529 college savings plan market.

May 14, 2002


[1] Section 529 college savings plans are established by states under section 529(b)(A)(ii) of the Internal Revenue Code as “qualified tuition programs” through which individuals make investments for the purpose of accumulating savings for qualifying higher education costs of beneficiaries.  A security may still constitute a municipal fund security subject to MSRB rules even if the issuer has not complied with Section 529 of the Internal Revenue Code in connection with an educational savings program or if it is issued for any other purpose (e.g., a local government investment pool), so long as it meets the definition set forth in Rule D-12.  Rule D-12 defines municipal fund security as a municipal security issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940 (the “Investment Company Act”), would constitute an investment company within the meaning of Section 3 of the Investment Company Act.

[2] Further interpretive guidance relating to municipal fund securities is provided in the following MSRB notices: Rule G-37 Interpretation – Interpretation on the Effect of a Ban on Municipal Securities Business Under Rule G-37 Arising During a Pre-Existing Engagement Relating to Municipal Fund Securities, April 2, 2002, published at http://ww1.msrb.org/msrb1/rules/notg37.htm; Rule G-30 Interpretation – Interpretive Notice on Commissions and Other Charges, Advertisements and Official Statements Relating to Municipal Fund Securities, December 19, 2001 (the “December 2001 Interpretation”), reprinted in MSRB Rule Book; Rule D-12 Interpretation – Interpretation Relating to Sales of Municipal Fund Securities in the Primary Market, January 18, 2001, reprinted in MSRB Rule Book.

[3] See Rule G-17 Interpretation – Interpretive Notice Regarding Rule G-17, on Disclosure of Material Facts, March 20, 2002, published at http://ww1.msrb.org/msrb1/rules/notg17.htm.  The MSRB interprets Rule G-17 to require a dealer to disclose to its customer, at or before the time of trade, all material facts concerning the transaction known by the dealer, as well as material facts about the security when such facts are reasonably accessible to the market.

[4] The MSRB has previously provided guidance on advertisements and commissions in the December 2001 Interpretation.

[5] For detailed discussions of the MSRB’s approach to rulemaking with respect to municipal fund securities, see “Municipal Fund Securities – Rule Changes Approved by the Securities and Exchange Commission,” MSRB Reports, Vol. 21, No. 1 (May 2001) at 21; “Municipal Fund Securities – Revised Draft Rule Changes,” MSRB Reports, Vol. 19, No. 3 (Sept. 1999) at 3; “Municipal Fund Securities,” MSRB Reports, Vol. 19, No. 2 (April 1999) at 9.

[6] See Section 529(c)(3) of the Internal Revenue Code.  State tax laws also may result in certain adverse consequences for use of funds other than for educational costs.

[7] The MSRB understands that investors may change designated beneficiaries and therefore amounts in excess of what a single beneficiary could use ultimately might be fully expended by additional beneficiaries.  The MSRB expresses no view as to the applicability of federal tax law to any particular plan of investment and does not interpret its rules to prohibit transactions in furtherance of legitimate tax planning objectives, so long as any recommended transaction is suitable.

[8] See Rule G-20 Interpretive Letter – Authorization of sales contests, June 25, 1982, reprinted in MSRB Rule Book.

[9] The rule defines advertisements broadly to consist of any material (other than listings of offerings) published or designed for use in the public, including electronic, media or any promotional literature designed for dissemination to the public, such as notices, circulars, reports, market letters, form letters, telemarketing scripts or reprints or excerpts of the foregoing.  The term does not apply to preliminary or final official statements but does apply to abstracts or summaries of official statements, offering circulars or other similar documents prepared by dealers.  This definition generally would include Internet websites and form or broadcast e-mail messages relating to municipal securities, including municipal fund securities.

[10] MSRB rules apply solely to dealers.  Although Rule G-21 does not govern advertisements published by issuers or other parties, the MSRB previously has stated that an advertisement produced by a dealer as agent for an issuer must comply with Rule G-21.  See Rule G-21 Interpretive Letter – Advertisements on behalf of issuer, February 24, 1994, reprinted in MSRB Rule Book.

[11] The rule also establishes standards for advertisement of initial reoffering prices or yields of new issue municipal securities.

[12] For example, if a dealer makes a statement in an advertisement that explicitly or implicitly refers to a particular feature of a security (e.g., the soundness or safety of an investment in such security), such dealer must include any information necessary to ensure that the advertisement is not materially false or misleading with respect to such feature.  See Rule G-21 Interpretive Letter – Disclosure obligations, May 21, 1998, reprinted in MSRB Rule Book.

[13] See December 2001 Interpretation.  The MSRB notes that these NASD and SEC advertising rules include essentially the same general “false or misleading” standard as does Rule G-21, in addition to itemized standards for specific elements of advertisements.

[14] See December 2001 Interpretation.

[15] The MSRB understands that NASD staff is willing to undertake an informal review of any municipal fund securities advertisements that a dealer may elect to voluntarily file with the NASD and to provide comment on any compliance concerns that may be raised by the advertisements under Rule G-21 and the relevant MSRB interpretations.  A dealer that voluntarily files its municipal fund securities advertisements with the NASD should consult with NASD staff regarding the legal effect of such filing as it relates to potential enforcement actions for violations of Rule G-21.

[16] For example, in the case of municipal bonds that are subject to the federal alternative minimum tax, the MSRB has stated that any statement in an advertisement that the bonds are tax-exempt must also disclose that they are subject to the alternative minimum tax.  See Rule G-21 Interpretive Letter – Advertising of securities subject to alternative minimum tax, February 23, 1988, reprinted in MSRB Rule Book.

[17] Merely identifying an underlying registered security would not trigger a requirement that additional details of the security be included.  Instead, information relating to the registered security that is specifically included in the advertisement must meet the appropriate standards in SEC and NASD rules with respect to such information.  Further, the MSRB does not require that such advertisement be filed with the NASD or SEC, although a dealer may voluntary do so.

[18] State legislation on the subject of taxation varies greatly, with some states providing broader tax benefits and others providing no favorable tax treatment.

[19] Letter dated April 1, 2002 from Craig S. Tyle, General Counsel, ICI, to Diane G. Klinke, General Counsel, MSRB (the “ICI Letter”).  In support of its request for such disclosure, the ICI states that it “believes it is appropriate for the MSRB to impose this additional disclosure requirement in connection with the delivery of Section 529 plan official statements even in the absence of a similar requirement in the case of traditional municipal securities.  First, the targeted market for Section 529 plan securities is generally middle-income investors saving for their children’s college education, as opposed to the market for traditional municipal securities, which is more likely to be made up of wealthier, more sophisticated investors.  Second, unlike traditional municipal securities, 529 plans are a relatively new product and there may be less knowledge among investors about the tax consequences of investing in them.”

[20] Of course, should the dealer proceed to provide information about such state tax consequences, it must ensure that the information meets the standards of Rule G-17 enunciated above.

[21] The rule requires that information regarding underwriting spread and fees paid in connection with the underwriting, as well as the initial offering price for securities other than municipal fund securities, be disclosed to customers.

[22] Inclusion in a manner no less prominent than information regarding other tax-related consequences of investing in the Section 529 college savings plan would be deemed to satisfy this requirement.

[23] Rule G-32(a)(i) requires delivery of an official statement to a customer purchasing municipal fund securities by settlement of the transaction.  In the case of a repeat purchaser who has already received the official statement, dealers generally are required to deliver any amendments or supplements to the official statement in connection with subsequent purchases of the securities.