MSRB NOTICE 2012-10 (MARCH 1, 2012)

MSRB REQUESTS COMMENT ON A CONCEPT PROPOSAL FOR ELECTRONIC DISSEMINATION OF 529 COLLEGE SAVINGS PLAN DISCLOSURE DOCUMENTS

The Municipal Securities Rulemaking Board (“MSRB”) is requesting comment on the effectiveness of internet disclosures to investors in 529 college savings plans (“529 Plans”) and on a concept proposal to potentially implement an electronic system for dissemination of basic 529 Plan disclosure documents, in order to promote more timely and durable access to critical disclosure information than under the current physical-delivery system.  Under the concept proposal, brokers, dealers, and municipal securities dealers (“dealers”) serving as primary distributors for 529 Plans would be obligated under MSRB Rule G-32 to ensure the timely posting of the basic 529 Plan disclosure documents (“Plan Disclosure Documents”) to the MSRB’s Electronic Municipal Market Access (EMMA®) free public website, and dealers selling 529 Plan interests would be obligated to notify their customers of how to access such free centralized disclosure documents on EMMA.[1]  Although the MSRB successfully implemented such an electronic primary market dissemination system for municipal bonds in 2009, the MSRB is seeking comments on this concept proposal to determine whether differences in the investment experience and sophistication of 529 plan customers, and the features of 529 Plans, justify the continuation of a physical-delivery system for Plan Disclosure Documents.

Comments should be submitted no later than April 2, 2012, and may be submitted in electronic or paper form.  Comments may be submitted electronically by clicking here.  Comments submitted in paper form should be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, VA 22314.  All comments will be available for public inspection on the MSRB’s website.[2]

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

BACKGROUND

Over the last decade, 529 Plans have grown in popularity as a means of investing to pay for the cost of a college education.[3]  According to the College Savings Plans Network (“CSPN”), an affiliate of the National Association of State Treasurers, investment in 529 Plans had reached a record level of $169.71 billion, as of June 30, 2011.[4]  As the assets in such plans have grown, so have the available investment strategies and options, thereby increasing the importance of the Plan Disclosure Document as a source of key investment information for investors.  529 Plan interests are offered primarily to individuals, and the MSRB is concerned that such individuals may often be unsophisticated investors who have little investment experience.  These investors, typically parents saving to pay for the college education of their children, have access to a variety of 529 Plans, which are offered by most states and the District of Columbia, each with unique and sometimes complex features and characteristics.

According to CSPN, as of mid-2011, there were 107 college savings and prepaid tuition plans established under Section 529 of the Internal Revenue Code as qualified tuition programs.[5]  Many states offer two types of 529 Plans, one type sold directly through the state, either by state employees or their designees (“direct-sold plans”), and another type sold through networks of broker-dealers (commonly known as “advisor-sold plans”).  With direct-sold plans, state sponsors typically retain financial professionals to assist with the selection of investment options, management of assets, and/or administration and distribution of the plans.  Often, dealers act as primary distributors of such plans, which are generally offered through the internet or a toll-free number.  Direct-sold plans typically have lower fees than advisor-sold plans but do not offer investment advice to their customers.  Understanding the differences between 529 Plans can be challenging, due to the different fees and costs; underlying investment strategies and portfolios and attendant risks, performance, and investment objectives; and state and federal tax considerations.  Information regarding the principal features of each plan is contained in the Plan Disclosure Document, which is updated periodically by the state sponsor.

PLAN DISCLOSURE DOCUMENT

Over time, CSPN, state sponsors, and others have collaborated to adopt and refine a set of disclosure principles to assist state sponsors of 529 Plans in organizing information considered significant for 529 Plan investors in comparing 529 Plans and making informed investment decisions.  On May 3, 2011, CSPN adopted Disclosure Principles Statement No. 5, which was intended to provide further guidance to state sponsors as to how Plan Disclosure Documents could be drafted in a more clear and concise manner.  These Plan Disclosure Documents are typically 50-70 pages in length and provide information to investors on the terms and conditions of investing in a particular 529 Plan.  The Plan Disclosure Documents generally cover topics such as: (a) setting up and contributing to an account; (b) understanding investment options, portfolio strategies and risks; (c) fees and costs; (d) choosing investments; (e) changing beneficiaries; (f) making withdrawals; and (g) tax and financial aid considerations.

MSRB DISCLOSURE REQUIREMENTS

Dealers effecting transactions in municipal securities, including interests in 529 Plans, are subject to a series of MSRB rules requiring disclosure to customers of key information concerning the transaction.  These disclosures serve two related but distinct purposes – ensuring that the customer has the information necessary to make an informed investment decision and also has information documenting the material terms of the securities it has purchased.

MSRB Plan Disclosure Document Delivery Requirement.  Under MSRB Rule G-32(a), dealers who sell interests in 529 Plans must deliver to the customer by no later than settlement of the transaction a copy of the Plan Disclosure Document.  In 2009, the MSRB amended its delivery rules for official statements (the basic disclosure document for municipal securities) to permit dealers to provide customers with notice of how to obtain official statements from EMMA, together with notice that a hard copy of the official statement would be provided by the dealer upon request.  This amendment was part of a broader series of changes to MSRB rules and systems that required underwriters to post official statements to EMMA, along with other key information relating to a new issue, more promptly.  These changes resulted in official statements for virtually all new issues of municipal securities becoming available to the general public, including all potential customers, on a free and immediate basis through an objective centralized source, effecting a significant shift from the prior paradigm under which physical delivery of disclosures were made solely to customers engaging in transactions in the particular security, without broader access for the entire marketplace and with the attendant delays and expense of physical delivery.  This system of electronic dissemination of primary market disclosure to the marketplace was adopted for all municipal securities except municipal fund securities, such as 529 Plans.  Dealers selling new issue municipal securities to customers generally satisfy their notice obligation by referencing a uniform resource locator (“URL”) on the transaction confirmation slip, which provides the customer with notice of where to obtain the official statement online.

At the time of the adoption of this public dissemination paradigm, the MSRB specifically excluded 529 Plans due to concerns that an electronic dissemination paradigm for 529 Plans might be inconsistent with the obligation of mutual fund companies to continue to deliver hard copies of mutual fund prospectuses under the rules of the Securities and Exchange Commission (“SEC”).[6]  While delivery of a hard copy of the Plan Disclosure Document is informative, the delivery need not be made at or prior to the time of trade, under MSRB rules.  Put another way, Plan Disclosure Documents are not necessarily delivered in time for investors to review the information prior to making an investment decision.  Rather, as with mutual fund prospectus delivery rules, Plan Disclosure Documents need not be delivered to customers until after the time of sale.

MSRB FAIR DEALING AND DISCLOSURE REQUIREMENTS 

Separately, MSRB Rule G-17 requires that dealers provide material information to 529 Plan investors at an earlier stage in the investment process.  The rule sets forth the basic customer protection obligation of dealers when executing municipal securities transactions with or on behalf of customers.  It 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.  The rule contains an anti-fraud provision, and a general duty to deal fairly, even in the absence of fraud.[7]

In order to satisfy its fair dealing obligation, a dealer must disclose, at or prior to the sale of municipal securities to a customer, all material information about the transaction known by the dealer, as well as material information about the security that is reasonably accessible to the market.[8]  Information available from “established industry sources” is deemed to be reasonably accessible to the market, and the MSRB has defined an “established industry source” as a source of information relating to municipal securities transactions generally used by dealers that effect transactions in the type of municipal securities at issue.  The MSRB has also noted that the EMMA system is considered to be an “established industry source.”[9]

A dealer must disclose material information about the security or transaction at or prior to the time of sale to a customer.[10]  The Supreme Court has stated that a fact is material when there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.[11] This obligation includes a duty to give the customer a complete description of the security, including a description of the features that likely would be considered significant by a reasonable investor and facts that are material to assessing the potential risks of the investment.[12]

In light of the disclosure obligation under MSRB Rule G-17, many dealers opt to provide the Plan Disclosure Document to the customer at or prior to the time of trade, as a means of disclosing material information to the customer about a particular 529 Plan.  Whether the delivery of the Plan Disclosure Document satisfies the disclosure obligation under Rule G-17 depends on whether the document contains all material information about the security or transaction, as required by the rule.

Certain dealers that participate in the sale of direct-sold plans, such as primary distributors of such plans, elect to deliver the Plan Disclosure Document electronically, as part of an enrollment kit, upon account opening by the customer.  The enrollment kit typically contains an account application, Plan Disclosure Document, and marketing material, such as a plan brochure.  The Plan Disclosure Document is generally provided in portable document format (“PDF”) and must be downloaded by the customer prior to opening the account.  By contrast, an investor who opens an advisor-sold plan account may receive the Plan Disclosure Document in hard copy, either at account opening, immediately prior to the time of sale, or by settlement of the transaction, depending on the practice of the dealer.  Since customers of advisor-sold plans typically open accounts through in-person meetings with their financial professionals, rather than through the internet, they generally receive Plan Disclosure Documents in hard copy, rather than electronically.

SEC MUTUAL FUND PROSPECTUS DELIVERY RULES

In 2009, the Securities and Exchange Commission (“SEC” or “Commission”) adopted new rules designed to simplify information provided to mutual fund investors.[13]  In part, the rules permit mutual fund companies to satisfy their prospectus delivery obligation under the Securities Act of 1933 by sending or delivering a 3-4 page summary prospectus to investors, in lieu of the complete, statutory prospectus, so long as the mutual fund company makes available on the internet, free of charge: (a) the current summary prospectus; (b) the statutory prospectus; (c) the statement of additional information; (d) the fund’s most recent annual report; and (e) the fund’s most recent semi-annual report.  Additionally, upon request, the mutual fund company (or financial intermediary through which fund shares are sold) must send to the customer at no cost, by first-class mail, a paper copy of items (b) – (e) within three business days of the request.

The summary prospectus must contain certain information, including information regarding the fund’s: (1) investment objectives and goals; (2) costs (the fund’s fee table and example); (3) principal investment strategies, risks, and performance; (4) management, including investment advisers and portfolio managers; (5) procedures for purchase and redemption of fund shares; (6) tax information; and (7) compensation of financial intermediaries.  In adopting the new rules, the Commission stated that the purpose of the rule amendments was “to improve mutual fund disclosure by providing investors with key information in plain English in a clear and concise format, while enhancing the means of delivering more detailed information to investors.”[14]

REQUEST FOR COMMENT

The MSRB seeks comment on the disclosure and delivery obligations under MSRB Rules G-17 and G-32, as they pertain to 529 Plans.  More specifically, the MSRB seeks comment on whether the disclosure and delivery requirements of these rules foster investor understanding of the material features and characteristics of 529 Plans, in order for investors to make informed investment decisions.  The MSRB also seeks comment about industry disclosure and investor education practices and whether those practices have changed with the evolution of the internet as a commercial venue.

With increasing online sales of interests in 529 Plans, the MSRB is interested in investor behavior, including investor access to and willingness to use the internet to learn about 529 Plans, compare different plans, and learn about their features and characteristics.  The MSRB is also interested in the view of market participants as to whether investors are more prone to read a hard copy disclosure document or an online version of such document, and whether there are any benefits or drawbacks to receiving the document in a particular manner.  In this regard, is it the case that most 529 Plan investors have access to the internet and are willing to use the internet to access Plan Disclosure Documents?  Are there differences in internet use based on age, socio-economic, or other circumstances that should be considered by the MSRB before promulgating an online document access rule?

The MSRB is also interested in understanding: (a) how investors use the Plan Disclosure Document and whether it is influential in making an investment decision; (b) whether the manner or timing of delivery of the Plan Disclosure Document affects the use of the document by investors; and (c) whether the Plan Disclosure Document is more useful to an investor who opens a direct-sold account, rather than an investor in an advisor-sold plan who may rely on the advice and recommendation of a financial professional.

While the MSRB has no ability to require state sponsors of 529 Plans to prepare summary disclosures, similar to the summary prospectus permitted by the SEC for mutual funds, the MSRB is interested in whether 529 Plan investors would benefit from a similar approach, given the fact that most 529 Plans consist primarily of underlying mutual fund options, whether as individual portfolios or as part of a particular investment strategy, such as an age-based strategy.  Further, the MSRB is interested in whether such an approach is feasible, given the multitude of underlying investment options offered by most 529 Plans including in particular options consisting of underlying investments other than mutual funds.

The MSRB also requests comment on the following specific items: 

1. What 529 plan disclosure documents are delivered by dealers to customers?

2. How are such disclosure documents delivered by dealers to customers (e.g., hard copy, electronic delivery of PDFs)?

3. When are such disclosure documents delivered by dealers to customers (e.g., at account opening, at or prior to the time of trade, or at settlement)?

4. Should investors in 529 plans receive plan disclosure documents in hard copy prior to making an investment decision?

5. Do investors in 529 plans have the requisite sophistication to access plan disclosure documents electronically?

6. Do investors in 529 plans have the requisite sophistication to review plan disclosure documents online by reference to a URL?

7. Have customers expressed a preference for receiving plan disclosure documents in hard copy or online?

8. Is there a benefit to customers in receiving the hard copy of the Plan Disclosure Document by settlement of the transaction?

9. Have customers described any benefits or drawbacks to receiving documents in hard copy?

10. Have customers described any benefits or drawbacks to receiving documents electronically?

11. Although account owners who open their accounts online are likely to anticipate receiving electronic delivery of documents through that online process, would it be appropriate for account owners that open their accounts through an office visit or by phone to then be expected to receive electronic delivery of documents?

12. Have clients who have established online accounts, whether through direct-sold or advisor-sold programs, expressed concern about delivery of plan disclosure documents electronically?

13. Could any cost savings achieved through lower mailing or printing costs as a result of implementation of an electronic access program be passed on to customers?

14. Have customers expressed confusion about the difference between complete Plan Disclosure Documents and plan disclosure supplements or amendments?

15. Is there a difference in sophistication between individuals who invest in 529 Plans and individuals who purchase traditional municipal securities such that an electronic access program would be inappropriate for 529 Plan customers? 

March 1, 2012


[1] EMMA® is a registered trademark of the MSRB.

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

[3] For a general discussion of 529 Plans, see generally, An Analysis of Section 529 College Savings and Prepaid Tuition Plans,  U.S. Department of Treasury (September 9, 2009), available at http://www.treasury.gov/press-center/press-releases/Documents/529.pdf.

[4] 2011 Mid-Year 529 Report, College Savings Plans Network (September 2011), available at http://www.collegesavings.org/document_download.aspx?documentID=436.

[5] Id.

[6] The SEC adopted an electronic prospectus dissemination paradigm in its 2005 Securities Offering Reform rules but excluded mutual fund prospectus delivery from that paradigm.  See Securities Act Release No. 8591 (July 19, 2005), 70 FR 44722 (August 3, 2005).

[7] See MSRB Notice 2009-42 (July 14, 2009) (“2009 Notice”).

[8] Id.

[9] Id.

[10] The time of sale, sometimes referred to as the “time of trade,” is when the investor and dealer agree to make the trade.  Id.

[11] Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309; 179 L. Ed. 2d 398; 2011 U.S. LEXIS 2416 (2011); Basic, Inc. v. Levinson, 485 U.S. 224 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).

[12] See 2009 Notice.

[13] See SEC Release Nos. 33-8998, IC-28584 (January 13, 2009).

[14] Id.