MSRB NOTICE 2005-58 (NOVEMBER 30, 2005)

REMINDER: NEW REQUIREMENTS RELATING TO PERFORMANCE DATA IN ADVERTISEMENTS OF 529 COLLEGE SAVINGS PLANS AND OTHER MUNICIPAL FUND SECURITIES BECOME EFFECTIVE ON DECEMBER 1, 2005

On December 1, 2005, amendments to Municipal Securities Rulemaking Board (“MSRB”) Rule G-21, on advertising, establishing specific requirements with respect to advertisements by brokers, dealers and municipal securities dealers (“dealers”) relating to 529 college savings plans and other municipal fund securities will become effective.[1]  The amendments include requirements regarding (i) the calculation and display of performance data for municipal fund securities, including the use and availability of performance data current to the most recent month-end, and (ii) legends and disclosures required to be included in advertisements containing such performance data.[2]  These requirements are consistent with Rule 482 adopted by the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended, in connection with the advertisement of mutual fund performance.  All advertisements of municipal fund securities containing performance data submitted or caused to be submitted for publication by a dealer on or after December 1, 2005 must comply with the amendments summarized below.[3]

Calculation and Display of Performance Data

New section (e)(ii) of Rule G-21 provides that advertisements of municipal fund securities that include performance data 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), after-tax return (but only if accompanied by average annual total return), or other non-prescribed performance measures (but only if accompanied by average annual total return and, if adjusted to reflect the effects of taxes, after-tax 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), tax-equivalent yield or tax-equivalent 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).[4]

Clauses (A) through (E) of Rule G-21(e)(ii) provide standards for applying the basic performance data calculation methods established for mutual funds under SEC Rule 482 to the unique characteristics of municipal fund securities.  Rule G-21(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 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[5] 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 and the month to which such information is current is identified; 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 and the month to which such information is current is identified.

(D) expenses having the same characteristics as those permitted to be paid under Rule 12b-1 adopted by the SEC under the Investment Company Act but not technically accrued under a 12b-1 plan must be treated as 12b-1 expenses for purposes of calculating performance;[6] and

(E) in calculating tax-equivalent 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 tax-advantaged 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 change.

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 G-21 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.  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.

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.

New Section (e)(i)(D) requires that these legends and disclosures be presented in the same format required under SEC Rule 482.

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Questions regarding this notice and amended Rule G-21 may be directed to Ernesto A. Lanza, Senior Associate General Counsel, Jill C. Finder, Assistant General Counsel, or Ghassan Hitti, Assistant General Counsel.

November 30, 2005


[2] Related amendments to Rule G-21, which became effective on September 1, 2005, require certain general disclosures regarding municipal fund securities that are similar in most respects to generalized disclosures currently required for mutual fund advertisements under rules of the Securities and Exchange Commission and incorporate certain prior MSRB interpretations.  See MSRB Notice 2005-48 (September 1, 2005).

[3] The full text of Rule G-21 is available at [click here to access Rule G-21].

[4] SEC Rule 482 incorporates the calculation methods set forth in Form N-1A, Form N-3 and Form N-4 for purposes of calculating the various types of quotations described in the rule.  These methods are also incorporated into Rule G-21(e)(ii).

[5] The term “use” is used with the same meaning as in SEC Rule 482.

[6] Thus, asset-based 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 12b-1 expenses for purposes of calculating performance even if any such charges may not technically be paid under a formal 12b-1 plan.  In addition, any 12b-1 expenses incurred in connection with underlying assets of the municipal fund securities also must be treated as 12b-1 expenses of the municipal fund securities to the extent that such expenses are not waived or not included within the asset-based charges described in the preceding sentence.