MSRB NOTICE 2011-33 (JULY 19, 2011)

REQUEST FOR COMMENT ON PLAN TO COLLECT INFORMATION ON 529 COLLEGE SAVINGS PLANS

To increase the amount of information available to the Municipal Securities Rulemaking Board (“MSRB”) and market participants regarding 529 College Savings Plans (“529 plans”), the MSRB is seeking comment on a plan to create a centralized system for the collection and dissemination of market information regarding 529 plans.  Just as it does for municipal bonds and notes, the MSRB’s Electronic Municipal Market Access (“EMMA”) system serves as a centralized venue for the submission of 529 plan primary offering disclosure documents (“plan disclosure documents”) and continuing disclosures, such as annual financial reports submitted to EMMA by issuers of 529 plans or their agents.  However, the MSRB does not currently collect and disseminate relevant 529 plan market or program-specific data as it does for the municipal bond market.

The MSRB’s plan would require brokers, dealers, and municipal securities dealers (“dealers”), acting in the capacity of underwriter (commonly known as “primary distributor”) of 529 plans, to submit to the MSRB on a quarterly basis certain information about the 529 plans they distribute.  The information would include basic 529 plan information that the MSRB believes is readily available to primary distributors, such as total plan assets, quarterly contributions and withdrawals, total number of active accounts, and total rollover distributions.  In addition, primary distributors would submit aggregate information regarding the assets in the underlying investment portfolios.  The MSRB would utilize this information to better understand the market for 529 plans and monitor the growth rate, composition, and size of individual plans and the industry as a whole, to inform our activities as the regulator of dealers in this market. 

Comments should be submitted to the MSRB by no later than August 31, 2011 and may be submitted in electronic or paper form.  Electronic comments may be submitted to the MSRB via email to CommentLetters@msrb.org.  Please indicate the notice number in the subject line of the email and, if possible, send comments in PDF format.  Written comments should be sent to Ronald W. Smith, Corporate Secretary, MSRB, 1900 Duke Street, Suite 600, Alexandria, VA 22314.  All comments will be available for public inspection on the MSRB’s website.[1] 

Questions about this notice should be directed to Lawrence P. Sandor, Senior Associate General Counsel, at 703-797-6600.

BACKGROUND

MSRB rules govern the activities of dealers who transact business in municipal fund securities, which include 529 plans, and, from time-to-time, the MSRB has issued interpretive guidance regarding such rules.  On March 31, 2006, the MSRB filed an interpretation on customer protection obligations relating to the marketing of 529 plans with the Securities and Exchange Commission (“SEC”) (the “2006 Notice”).[2]  The 2006 Notice addressed the basic customer protection obligations of dealers in 529 plans, including their disclosure obligations under MSRB Rule G-17.  In the 2006 Notice, the MSRB noted that various organizations, including the College Savings Plans Network (“CSPN”), an affiliate of the National Association of State Treasurers, and certain private entities had established websites about 529 plans.[3]  At that time, the MSRB urged market participants to develop a more comprehensive and user-friendly system of established industry sources for the 529 plan market.  An established industry source is considered by the MSRB to be one which provides a broad variety of information that professionals can and do use to obtain material information about municipal securities, including 529 plans.[4]  The MSRB stressed the importance of disclosure of material information regarding 529 plans and commented that it had long been an advocate for the best possible disclosure practices by the 529 plan community, though it lacked the authority to mandate specific disclosures by issuers.  Over the years, the MSRB has worked with CSPN and individual states on, among other issues, disclosure principles and best practices, in order to better inform and protect investors.[5] 

Given the complexity of 529 plans and their unique characteristics, such as individual state tax treatment, the MSRB urged market professionals to develop more comprehensive websites with features that would assist the general public in more easily understanding the key terms of 529 plans, such as side-by-side comparisons of different 529 plans.  In this regard, CSPN, for example, has developed a website that aggregates information regarding 529 plans and enables investors to compare plans by state and by feature.  CSPN has also published periodic reports on the 529 plan market, such as the 2010 year-end report published in April 2011. [6]  According to CSPN, the report aggregates information submitted by 104 college savings and prepaid tuition plans and includes information such as total assets invested in 529 plans annually, average 529 plan account size, and total contributions to new and existing 529 plans.

The MSRB views these established industry sources as critical to providing investors and investment professionals who transact business in 529 plans with material information necessary for investors to make informed investment decisions.  In the 2006 Notice, the MSRB noted that it would monitor the 529 plan market closely and consider whether further rulemaking would be appropriate regarding the 529 plan disclosure dissemination system.

MSRB DISCLOSURE INITIATIVES

In July 2006, the MSRB sought comment on an electronic system for dissemination of primary market disclosures for municipal securities that would permit dealers to advise customers that an official statement - the basic disclosure document for municipal securities - was available for free electronically and that a printed version would be provided to the customer upon request.[7]  In order to establish such a system, the MSRB explained that official statements would need to be readily available to customers and that it would be preferable if the official statements were made available at a centralized website.  The notice further sought comment as to whether the MSRB should undertake the centralizing function and whether such an electronic dissemination system should extend to 529 plans, so that plan disclosure documents would be available to all investors for free on a centralized website rather than continuing to depend on paper dissemination to individual customers. 

As a follow-up to the initial 2006 notice, the MSRB published a notice in January 2007 seeking comment on a proposed rule change to establish such an electronic access system for official statements.[8]  Although dealers could not rely on the availability of 529 plan disclosure documents as a substitute for paper delivery,[9] primary distributors would be required under the proposed rule change to submit plan disclosure documents to the MSRB’s central collection facility so that such documents could be made publicly available for free.

The MSRB implemented an electronic system for free public access to primary market disclosure documents through EMMA, with its primary market disclosure service becoming effective on June 1, 2009.[10]  Since that date, 529 plan primary distributors have been obligated to submit plan disclosure documents and supplements to EMMA, pursuant to MSRB Rule G-32.[11]

In January 2008, in coordination with changes to Exchange Act Rule 15c2-12 (“Rule 15c2-12”), the MSRB sought comment on a continuing disclosure service that would be incorporated into EMMA.[12]  The service would display annual financial information and notices of specific material events provided by issuers or their agents under continuing disclosure agreements as contemplated by Rule 15c2-12.  Primary distributors of 529 plans generally are obligated to determine that continuing disclosure agreements have been entered into in connection with such 529 plans.[13] The MSRB implemented the continuing disclosure service of EMMA on July 1, 2009.[14]  Since that date, states have been submitting continuing disclosures regarding 529 plans to EMMA, such as audited financial statements. 

While the MSRB’s EMMA system now collects and publishes plan disclosure documents and continuing disclosures regarding 529 plans distributed by dealers, the MSRB does not currently collect other information, such as information regarding plan assets, contributions or withdrawals.  Similarly, the MSRB does not collect data regarding the underlying investment portfolios, such as the assets in or contributions to age-based or target date portfolios. Many programs offer a variety of portfolios to investors including portfolios that invest predominantly in equities of large, mid-size, or small companies based on capitalization, or equities of international companies.  Other portfolios offer a balance of equities and fixed income securities, or a combination of such securities that are rebalanced to include a greater percentage of fixed income securities as a target date is approached or, similarly, an age-based portfolio that rebalances to include more fixed-income securities as the beneficiary approaches college age.  Further, as a result of recent market volatility, some plans have introduced products that seemingly offer more certainty to investors, such as bank certificates of deposit or guaranteed investment contracts.

In contrast, EMMA currently serves as a free venue for public access to a broad range of information for municipal bonds, such as basic identifying information, maturity schedules, interest rates, and initial offering price; trade price information collected by the MSRB’s Real-time Transaction Reporting System (RTRS); interest rate reset information, information about liquidity providers, and key liquidity documents for variable rate demand obligations collected by the MSRB’s Short-term Obligation Rate Transparency (SHORT) system; and auction results, order information, and key documentation concerning the auction process for auction rate securities collected by the SHORT system.  Such data and documents are collected in a manner that facilitates efficient searches on EMMA for specific securities based on a broad range of parameters.

The MSRB believes that it is important to collect additional information about 529 plans both to improve meaningful free public access to such information and to assist the MSRB in better understanding the market for 529 plans, in order to inform our activities.  The MSRB also believes that it is important to collect such information in a manner that allows for an efficient and effective search for such information on EMMA and on a schedule that assures that such information reflects current activities. 

Among the data points that the MSRB believes would be useful to the MSRB and to investors include, among others:

·         Total aggregate assets held in 529 plans

·         Total assets held in each 529 plan, reported on a quarterly basis

·         Types of underlying investment portfolios available in each 529 plan and total assets invested in each such portfolio

·         Total quarterly contributions in dollars to each 529 plan and to each underlying investment portfolio

·         Total quarterly withdrawals in dollars from each 529 plan and from each underlying investment portfolio

The MSRB seeks comments regarding the data points listed above, as well as input on any additional data points that may be helpful to collect and disseminate to the public.  Are there certain such data points which, although helpful for the MSRB to collect for its regulatory and related purposes, may not be appropriate or useful for public dissemination?  The MSRB believes that certain information that would be provided on a cumulative basis, such as aggregate contributions to and withdrawals from individual 529 plans, and similar information, would be most appropriately collected on a quarterly basis.  The MSRB seeks comment on the appropriate timing for submission of various data points.

More specifically, the MSRB requests comment on the following:

1.      Whether dealers who act as primary distributors of 529 plans have the ability to gather and report to the MSRB plan level contribution and withdrawal data on a quarterly basis?

2.      Whether certain data would be difficult to produce to the MSRB on a quarterly basis or would result in an undue burden on dealers?

3.      Whether dealers or issuers consider certain data proprietary, which should not be produced to the MSRB or displayed on EMMA?

4.      Whether there are other categories of data not described above that might be worthwhile to display on EMMA for the benefit of market participants or useful to the MSRB in its rulemaking process?

5.      In what ways can the presentation of 529 plan documents and information on EMMA be improved to better serve investors and the general public?

6.      While plan disclosure documents generally contain fee disclosures, should this information be presented on EMMA in a way that investors can compare the fees of different 529 plans?

7.      Finally, whether the MSRB should consider a rule change to permit the dissemination of plan disclosure documents electronically, as it does for other municipal securities, so that dealers could advise customers that the plan disclosure document is available for free electronically (on EMMA, for example) and that a printed version would be provided to the customer upon request?

July 19, 2011

[1] Comments are posted on the MSRB website without change and personal identifying information, such as name, address, telephone number or email address, will not be edited from submissions.  Therefore, commentators should submit only information they wish to make available publicly.

[4] MSRB Notice 2006-07, Note 10 (March 31, 2006).

[5] CSPN has recently published its Disclosure Principles No. 5 on May 3, 2011(www.collegesavings.org/legislativeInitiative.aspx), which assists states in improving the quality of disclosure to investors about their 529 plans.

[6] College Savings Plans Network 529 Report (April 2011) (www.collegesavings.org).

[7] MSRB Notice 2006-19 (July 27, 2006). This proposal was modeled in large measure on the electronic prospectus dissemination model, sometimes referred to as “access equals delivery”, that had recently been adopted by the SEC in connection with most registered securities.

[8] MSRB Notice 2007-05 (January 25, 2007).

[9] Some commenters on the January 2006 notice felt that it would not be appropriate to move to electronic dissemination for 529 plans at that time due in large measure to the fact that the SEC had not included mutual funds, which serve as the primary assets for most 529 plans, in its own “access equals delivery” paradigm.

[10] MSRB Notice 2009-22 (May 22, 2009).

[11] MSRB rules apply solely in connection with 529 plans marketed through dealers regulated by the MSRB. However, beginning in May 2011, EMMA permits states to voluntarily submit plan disclosure documents for 529 plans that are not marketed by dealers for public dissemination through EMMA.

[12] MSRB Notice 2008-05 (January 31, 2008).

[13] Interpretation Relating to Sales of Municipal Fund Securities in the Primary Market, MSRB Notice 2001-02 (January 19, 2001).