MSRB NOTICE 2004-43 (DECEMBER 16, 2004)

REQUEST FOR COMMENTS ON DRAFT AMENDMENT RELATING TO PERFORMANCE DATA IN ADVERTISEMENTS OF MUNICIPAL FUND SECURITIES

The Municipal Securities Rulemaking Board (“MSRB”) has filed with the Securities and Exchange Commission (“SEC”) a proposed rule change to Rule G-21, on advertising, that establishes requirements relating to the inclusion of performance data in advertisements used or produced by brokers, dealers and municipal securities dealers (“dealers”) relating to municipal fund securities (the “pending rule change”).[1] These requirements are, in most respects, consistent with the requirements applicable under Rule 482 adopted by the SEC under the Securities Act of 1933, as amended, for mutual fund advertisements that contain performance data. The proposed rule change was adopted by the MSRB following its review of comments received from industry participants on draft amendments relating to advertisements of municipal fund securities and draft interpretive guidance on disclosures in connection with out-of-state sales of 529 college savings plans published on June 10, 2004 (the “June Notice”).[2]

One provision of SEC Rule 482 that was not included in the original draft amendments to Rule G-21 as set forth in the June Notice requires that mutual fund advertisements showing performance data also include a phone number or website address at which performance data may be obtained that is current to the most recent month, available no later than seven business days after the end of the month. In the June Notice, the MSRB had expressed concern that, even with the modifications to the existing requirements of SEC Rule 482 included in the draft amendments to Rule G-21 to recognize the differences between municipal fund securities and mutual funds, the methods of calculating performance prescribed under the SEC rule might not be well suited for certain municipal fund securities structures. Although the MSRB felt that dealers would be able to obtain necessary information to disclose performance as of the most recently completed calendar quarter, the MSRB was concerned that the structures of the municipal fund securities markets might make it unreasonably burdensome to include a monthly requirement with a fixed timeframe that could prove problematic to dealers if the necessary information to make such calculations is not available in a timely manner. In addition, the MSRB was concerned that such a requirement could create an unfair advantage for dealers that market 529 college savings plans that are structured more closely along the model of traditional mutual funds as compared to 529 college savings plans that have more unique structures and therefore may face greater difficulty in meeting such requirement.

In response to the June Notice, certain commentators suggested that the MSRB further amend Rule G-21 to incorporate such a requirement. These commentators stated that this would make the MSRB’s advertising rule consistent with the similar requirement established under SEC Rule 482. Rule 482 requires that mutual fund advertisements that show performance data also include a phone number or web site address at which performance data may be obtained that is current to the most recent month, available no later than seven business days after the end of the month.

The MSRB agrees that such information would be extremely useful to investors, particularly since it would allow closer comparisons between different investment options. Thus, the MSRB is publishing for industry comment a draft amendment to Rule G-21, as amended by the pending rule change, that would require dealers to include in advertisements that contain performance data for municipal fund securities a phone number or web address where investors may obtain performance data current to the most recent month-end.

Specifically, the draft amendment would amend clause (C) of new section (e)(ii) of Rule G-21 as set forth in the pending rule change to provide that performance data in advertisements must be calculated as of the most recent practicable date considering the type of municipal fund securities and the media used, except that any advertisement containing total return quotations would be in compliance with this requirement if:

(1)(a) total return quotations are current to the most recent calendar quarter ended prior to the submission of the advertisement for publication for which such return, or all information required for the calculation of such return, is available to the dealer, and (b) total return quotations, current to the most recent month ended seven business days prior to the date of any use for which such return, or all information required for the calculation of such return, is available to the dealer are provided at a toll-free (or collect) telephone number or website identified in the advertisement; or

(2) total return quotations are current to the most recent month ended seven business days prior to the date of any use of the advertisement for which such return, or all information required for the calculation of such return, is available to the dealer.

In addition, the draft amendment would amend clause (C)(1) of new section (e)(i) of Rule G-21 as set forth in the pending rule change to require that any municipal fund securities advertisement that displays performance information must identify either a toll-free (or collect) telephone number or a website where an investor may obtain total return quotations current to the most recent month-end for which such return is available.

The MSRB seeks comment on all aspects of the draft amendment, including in particular whether such a requirement would create an undue burden on or provide an undue advantage to any segments of the municipal fund securities market. Comments from all interested parties are welcome. Comments should be submitted no later than January 19, 2005 and may be directed to Ernesto A. Lanza, Senior Associate General Counsel, or Jill C. Finder, Assistant General Counsel. Written comments will be available for public inspection.

December 16, 2004

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TEXT OF DRAFT AMENDMENT TO RULE G-21[3]

Rule G-21. Advertising.

(a)-(d) No additional changes.

(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:

(i) Required disclosures. Each advertisement for municipal fund securities:

(A)-(B) No additional changes.

(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; and that current performance may be lower or higher than the performance data included in the advertisement. Unless the advertisement includes total return quotations current to the most recent month ended seven business days prior to the date of any use of the advertisement, the legend must also identify either a toll-free (or collect) telephone number or a website where an investor may obtain total return quotations current to the most recent month-end for which such total return, or all information required for the calculation of such total return, is available; and

(2) No additional changes.

(D) No additional changes.

(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)-(B) no additional changes.

(C) performance data shall be calculated as of the most recent practicable date considering the type of municipal fund securities and the media through which data will be conveyed, except that any advertisement containing total return quotations will be considered to have complied with this paragraph provided that:

(1) (a) the total return quotations are current to 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; and

(b) total return quotations, current to the most recent month ended seven business days prior to the date of any use of the advertisement for which such total return, or all information required for the calculation of such total return, is available to the broker, dealer or municipal securities dealer as described in clause (A) of this paragraph are provided at the toll-free (or collect) telephone number or website identified pursuant to paragraph (i)(C)(1) of this section (e); or

(2) the total return quotations are current to the most recent month ended seven business days prior to the date of any use of the advertisement for which such total return, or all information required for the calculation of such total return, is available to the broker, dealer or municipal securities dealer.

(D)-(F) No additional changes.

(iii)-(vi) No additional changes.

(f) No additional changes.



[1] See MSRB Notice 2004-42 (December 16, 2004). Municipal fund securities are defined in Rule D-12 as municipal securities issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940, would constitute an investment company under the Act. Section 2(b) of the Investment Company Act provides that the Act does not apply to, among others, a state or any political subdivision of a state, or any agency, authority, or instrumentality of a state. There are two principal forms of municipal fund securities that are marketed by dealers: (i) interests or shares in college savings plans, which are established by states under Section 529(b)(A)(ii) of the Internal Revenue Code of 1986 as “qualified tuition programs” through which individuals make investments for the purpose of accumulating savings for qualifying higher education costs of beneficiaries; and (ii) interests or shares in local government investment pools, which are established by state or local governments as vehicles for the pooled investment of public moneys of participating governmental entities.

[3] Underlining signifies insertions to existing Rule G-21, as amended by the Pending Rule Change; strikethrough signifies deletions from existing Rule G-21, as amended by the Pending Rule Change.

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