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MSRB Notice 2004-16 (June 10, 2004)

Request for Comments on Draft Amendments Relating to Advertisements of Municipal Fund Securities and Draft Interpretive Guidance on Disclosures in Connection with Out-of-State Sales of College Savings Plan Shares

 

 

The Municipal Securities Rulemaking Board (“MSRB”) has established a number of specific interpretive standards under its advertising rule, Rule G-21, in connection with advertisements used or produced by brokers, dealers and municipal securities dealers (“dealers”) relating to municipal fund securities, including in particular advertisements for college savings plans.[1]  In addition, the MSRB has provided interpretive guidance regarding dealers’ point-of-sale disclosure obligations under the MSRB’s basic fair practice rule, Rule G-17, as such obligations apply to the marketing of shares of a state’s college savings plan to individuals who are residents of a different state.  These and other MSRB rules and interpretive positions are designed, among other purposes, to ensure that material information on the municipal fund securities market (particularly the rapidly evolving and growing college savings plan market) is made available in a meaningful and accurate manner to customers who invest in municipal fund securities through dealers.[2]

In furtherance of the MSRB’s statutory mandate to protect investors and the public interest, the MSRB is publishing for industry comment draft amendments to Rule G-21 that would:  (i) require that performance data included in advertisements for municipal fund securities be calculated and displayed, together with related legends and disclosures, in the manner required under Securities Act Rule 482 adopted by the Securities and Exchange Commission (“SEC”) in connection with mutual fund advertisements, with certain modifications; (ii) require that all advertisements for municipal fund securities include general disclosure language based in part on a similar requirement in SEC Rule 482, with additional language in the case of college savings plan advertisements relating to benefits available solely to state residents; and (iii) incorporate into the rule language the MSRB’s previously enunciated interpretive standards, with certain modifications.  Furthermore, the MSRB is publishing for industry comment draft interpretive guidance under Rule G-17 that would broaden the existing point-of-sale disclosure obligation relating to out-of-state investments in college savings plans to include disclosures regarding the potential loss of other state benefits (in addition to tax benefits) that may be offered to individuals who invest in their home state college savings plans.  The draft amendments and draft interpretive guidance are described more fully below.  Comments are due by September 15, 2004.

DRAFT AMENDMENTS TO RULE G-21, ON ADVERTISING

Rule G-21 establishes general ethical standards for dealer advertisements.  Under section (b) of 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 under section (c) of the rule from publishing any advertisement concerning municipal securities that it knows or has reason to know is materially false or misleading.[3]  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.[4]  Advertisements are defined broadly under the rule and generally consist of any materials published or designed for use in the public, including electronic (e.g., Internet web sites, form e-mail messages, scripted telemarketing calls, fax broadcasts), media (e.g., print, television, radio) or 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.  However, issuer-prepared disclosure materials such as program disclosure documents produced in connection with college savings plans or information statements produced in connection with local government investment pools are not considered advertisements for purposes of Rule G-21.[5]

In an interpretive notice published in 2002 (the “2002 MSRB Notice”), the MSRB established specific standards for inclusion of certain types of information in municipal fund security advertisements, with emphasis on college savings plan advertisements.[6]  Today, the MSRB is proposing draft amendments to Rule G-21 that would incorporate the advertising standards enunciated in the 2002 MSRB Notice, with certain modifications described below.  The standards from the 2002 MSRB Notice would be supplemented by specific requirements regarding the calculation and display of performance data in advertisements in a manner consistent with SEC Rule 482.  In addition, the draft amendments would include general disclosure requirements regarding municipal fund securities that are similar in most respects to generalized disclosures currently required for mutual fund advertisements under SEC Rule 482.  The draft amendments are included at the end of this notice.  If the draft amendments are adopted, the MSRB would expect to withdraw the portions of the 2002 MSRB Notice relating to advertisements.  The MSRB seeks comments on all aspects of the draft amendments.

Historical Performance Data

Current Standard.  Under current Rule G-21 as interpreted in the 2002 MSRB Notice, the use of historical performance data in an advertisement requires a description of the nature and significance of such data to assure that the advertisement is not false or misleading.  Further, depending upon the facts and circumstances, a dealer may be required to disclose information on fees or other charges that may have a material effect on the advertised performance data if necessary to ensure that the advertisement is not materially false or misleading.  An advertisement that includes performance data must make clear that such information relates to past performance, which may not be indicative of future investment performance.

Except as described in the preceding paragraph, the MSRB has not specified that dealers must calculate or display performance data contained in municipal fund security advertisements in any particular manner.  This contrasts with existing regulation of mutual fund advertisements that include performance data.  SEC Rule 482 sets forth detailed requirements on how such data, if included in mutual fund advertisements, must be calculated and displayed, in part by reference to the registration statements used for registration of mutual funds and variable annuities.[7]  Thus, performance data presented by a dealer in a mutual fund advertisement generally must be consistent with performance data presented by the mutual fund itself in its registration statement.

In the case of municipal fund securities, however, issuers are not subject to the registration requirements of the Securities Act of 1933 under Section 3(a)(2) or the Investment Company Act of 1940 under Section 2(b).  Thus, there are no mandated methods for issuers of municipal fund securities to calculate performance, nor is there any requirement for such issuers to make such calculations or to present performance data in any document available to investors or others.  The methods of computing mutual fund performance under SEC rules are based in part on the assumption that mutual funds are structured in accordance with the limitations imposed by the Investment Company Act.  Because issuers of municipal fund securities are exempt from the Investment Company Act and most other federal securities laws, they may act in their best judgment in widely divergent manners in structuring their programs and securities.  Some of these structures may introduce variants on the traditional mutual fund models that can result in the SEC calculation methods to be not ideally suited, without modification, for calculating performance of these municipal fund securities.

The 2002 MSRB Notice did not include guidance on performance calculations and other matters covered by SEC Rule 482 since the provisions of that rule were then subject to change as a result of the publication for comment by the SEC of proposed amendments to Rule 482 simultaneously with the publication of the 2002 MSRB Notice.[8]  The 2002 MSRB Notice did confirm previous guidance in which the MSRB had stated that a municipal fund security advertisement that would be compliant with the SEC and NASD mutual fund advertising rules, if applied to the municipal fund security advertisement as if municipal fund securities were shares of a registered mutual fund, also would be in compliance with MSRB Rule G-21.  Thus, a dealer wishing to include performance data in an advertisement could electively use the methods required by the SEC for mutual fund advertisements under SEC Rule 482 with the assurance that the advertisement would be in compliance with the MSRB’s advertising rule.  However, dealers are not required to use these SEC methods and currently are permitted to display performance in ways that diverge from the standards that exist in the mutual fund industry, so long as the performance data is not false or misleading.  The lack of specific required computational and presentation standards could result in significantly less comparability between different municipal fund security advertisements than currently exists for mutual fund advertisements.

Draft Amendments.  Proposed new section (e)(ii) of Rule G-21 would require dealer advertisements of municipal fund securities that include performance data to 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.  The modifications included in the draft language reflect the fact that certain items of information that exist in the mutual fund industry – such as the registration statement and the specific items of information required to be disclosed in the prospectus and statement of additional information – do not exist for municipal fund securities.  In particular, the draft language 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 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 reasonably available to the dealer; and (D) expenses having the same characteristics as those permitted to be paid under Investment Company Act Rule 12b-1 but not technically accrued under a 12b-1 plan must be treated as 12b-1 expenses for purposes of calculating performance.[9]  In addition, the draft language confirms that these provisions of Rule G-21 would apply solely to the calculation of performance relating to municipal fund securities and not to the calculation of performance for any security (such as a mutual fund) held as an underlying asset of the municipal fund securities.

Proposed Rule G-21(e)(ii) would effectively provide that, 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 would be 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 would be 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).[10]  Performance data included in municipal fund security advertisements would be 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.

The MSRB understands that it is possible that, even with the modifications described above, the methods of calculating performance prescribed under SEC Rule 482(d) or (e) may not be well suited for certain municipal fund security structures.  The MSRB seeks specific, detailed comments addressing any shortcomings in the proposed calculation methods for particular structures (including descriptions of the specific features of such structures that cause the proposed calculation methods to be deficient) and what further modifications, deletions or additions would be needed to make such calculation methods produce meaningful information for investors that is not misleading.

In addition, the draft amendments include in new Section (e)(i)(B) certain related legends and disclosures currently 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,[11] that the value of holdings is subject to fluctuation, and that current performance may be different from the performance data included in the advertisement.  Pursuant to the draft amendments, advertisements containing performance data also would be 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.[12]  The MSRB views the nonrecurring fees that would be the subject of this disclosure as including 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)(C) would require that these legends and disclosures be presented in the same format required under SEC Rule 482.

General Disclosures

SEC Rule 482 requires that most mutual fund advertisements include generalized disclosure that investors should consider the fund’s investment objectives, risks and charges before investing; that the prospectus contains this and other information about the fund; that the prospectus should be read carefully before investing; and identifying where a prospectus can be obtained.  In the case of a money market fund, Rule 482 also requires disclosure that investments are not insured and, if the fund seeks to maintain a stable net asset value, it is still possible to lose money.  Such disclosures are not currently required under MSRB Rule G-21 for municipal fund security advertisements.

The draft amendments would include in section (e)(i)(A) of Rule G-21 a provision modeled after these SEC general disclosure requirements, with certain modifications.  The modifications recognize the difference between the prospectus required for mutual funds and the official statement indirectly required for municipal fund securities under Exchange Act Rule 15c2-12 adopted by the SEC.[13]  In addition, new section (e)(i)(A)(1) would require that advertisements of college savings plans include a statement that advises investors to consider whether their home states offer tax or other benefits that are only available when investing in their home states’ college savings plan.[14]  New section (e)(i)(C) would require that these general disclosures be presented in the same format required under SEC Rule 482.

The MSRB observes that municipal fund securities consisting of interests in college savings plans are oriented exclusively to retail investors and entail a number of features with which most potential investors may not be familiar.  In addition, the perception that college savings plan interests and mutual fund shares are substantially the same investment product may not reflect reality and may lead many investors to believe that the same rules and structures apply in the college savings plan market as in the mutual fund market.  The MSRB currently provides general information regarding college savings plans and certain information for investors at its web site.[15]  The MSRB seeks comment on whether the proposed general disclosure language required under new section (e)(i)(A)(1) for advertisements of college savings plans also should include specific reference to an MSRB-maintained web site where generalized information of this nature would be provided and, if so, the extent to which the information currently provided on the MSRB web site described above should be included, modified, supplemented or deleted.[16]

Additional Amendments Based on 2002 MSRB Notice

The 2002 MSRB Notice provides guidance with respect to a number of other elements that may appear in municipal fund security advertisements.  These relate to the nature of the issuer and the securities, the capacity of the dealer and other parties, tax consequences, and information about the mutual funds in which municipal fund security assets are invested.  The draft amendments would include new paragraphs (iii) through (vi) of section (e) that would codify into the rule language these interpretive positions, with limited modifications noted below.

Nature of Issuer and Security.  Draft section (e)(iii) would require that an advertisement: (i) for a specific municipal fund security provide sufficient information to identify the specific security in a manner that is not false or misleading; (ii) that identifies a specific municipal fund security include the name of the issuer, presented in a manner no less prominent than any other entity identified in the advertisement, and not imply that a different entity is the issuer of the municipal fund security; (iii) not raise an inference that, because municipal fund securities are issued under a government-sponsored plan, investors are guaranteed against investment losses if no such guarantee exists; and (iv) that concerns a specific class or category of an issuer’s municipal fund securities (e.g., A shares versus B shares; direct sale shares versus advisor shares; in-state shares versus national shares; etc.) clearly disclose this fact in a manner no less prominent than the information provided with respect to such class or category.[17]

Capacity of Dealer and Other Parties.  Draft section (e)(iv) would require an advertisement that relates to or describes services provided with respect to municipal fund securities to clearly indicate the entity providing such services.  In addition, an advertisement soliciting purchases of municipal fund securities that would be effected by any party other than the dealer that publishes the advertisement (i.e., the issuer or another dealer) must clearly state which entity would effect the transaction.

Tax Consequences and Other Features.  Draft section (e)(v) would require that any discussion of tax implications or other benefits or features of investments in municipal fund securities included in an advertisement not be false or misleading.[18]  In the case of an advertisement that includes statements regarding tax or other benefits offered under state or federal law, the advertisement must make clear the nature of such benefits and that the availability of such benefits may be materially limited based upon residency, purpose for or timing of share redemptions, or other factors, as applicable, which limitations must be described in the advertisement and presented in close proximity to, and in a manner no less prominent than, the description of such benefits.[19]

Underlying Registered Securities.  Draft section (e)(vi) would require that, if an advertisement for a municipal fund security provides specific details of a security held as an underlying asset of the municipal fund security, the details included in the advertisement relating to such underlying security be presented in a manner that would be in compliance with any SEC or NASD advertising rules that would be applicable if the advertisement related solely to such underlying security.  However, details of the underlying security so included in the advertisement must be accompanied by any further statements relating to such details necessary to ensure that the inclusion of such details does not cause the advertisement to be false or misleading with respect to the municipal fund securities advertised.[20]  Further, the draft rule language would make clear that this provision does not limit the applicability of any rule of the SEC, NASD or any other regulatory body relating to advertisements of securities other than municipal fund securities, including advertisements that contain information about such other securities together with information about municipal fund securities.[21]

DRAFT INTERPRETIVE GUIDANCE ON DISCLOSURE OF IN-STATE BENEFITS UNDER RULE G-17

The MSRB has interpreted Rule G-17 to require a dealer to disclose to its customer at or prior to the time of trade (i.e., at the point-of-sale) all material facts about the transaction known by the dealer, as well as material facts about the security that are reasonably accessible to the market.[22]  In the 2002 MSRB Notice, the MSRB stated that Rule G-17 also obligates a dealer that sells to a customer an out-of-state college savings plan interest to disclose that, depending upon the laws of the customer’s home state, favorable state tax treatment for investing in a college savings plan may be limited to investments made in a college savings plan offered by the customer’s home state.[23]  The obligation to disclose the potential loss of state tax benefits could be met if the required disclosure is included in the official statement delivered to the customer, appearing in a manner reasonably likely to be noted by an investor.  This disclosure is required in all transactions effected by a dealer with a customer investing in an out-of-state college savings plan, regardless of whether the dealer has made a recommendation to the customer.

In addition to state tax benefits, some states offer some or all of their residents, if they invest in their in-state college savings plan, other benefits such as scholarships to in-state colleges, matching grants into their college savings plan accounts, or reduced or waived program fees, among other benefits.  In some cases, the value of these other benefits can be considerably higher than the state tax benefits offered by some states.  This can be particularly true for those benefits that the state may specifically target toward its lower-income residents.  The nature of these other benefits can vary from state to state even more than state tax benefits and may be even less well understood by the general investing public.

Thus, the MSRB is publishing for comment draft interpretive guidance that would broaden the existing Rule G-17 point-of-sale disclosure interpretation to include reference to other potential benefits offered solely in connection with in-state investments.  The guidance would clarify that such disclosure made through the issuer’s official statement is effective for purposes of the Rule G-17 point-of-sale disclosure obligation only if the official statement is provided to the customer at or prior to the time of trade and would strengthen the minimum standards for prominence in the official statement required to satisfy the disclosure obligation by means of the official statement.

The draft interpretive language is set forth below:

In the case of sales to a customer of out-of-state college savings plan interests, Rule G-17 requires a dealer to disclose, at or prior to the time of trade, that, depending upon the laws of the customer’s home state, favorable state tax treatment for investing in a college savings plan or other benefits offered under state law in connection with investing in college savings plans may be available only if the customer invests in a college savings plan offered by the customer’s home state.  The dealer also must suggest to such customer that he or she consult with a qualified adviser or contact his or her home state’s college savings plan to learn more about any state tax or other benefits that might be available in conjunction with an investment in that state’s college savings plan.

This disclosure obligation may be met if the disclosure appears in the official statement, so long as the official statement has been delivered to the customer by the time of trade and the disclosure appears in the official statement in a manner that is reasonably likely to be noted by an investor.  A presentation of this disclosure in the official statement in close proximity and with equal prominence to the first presentation of information regarding other federal or state tax-related consequences of investing in the college savings plan, and in close proximity and with equal prominence to each other presentation of information regarding state tax-related consequences of investing in the college savings plan, would be deemed to satisfy this requirement.  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 in the official statement in the described manner, the dealer would remain obligated to disclose such information separately to the customer under Rule G-17.

Of course, should the dealer proceed to provide information about state tax or other benefits available to an out-of-state investor, it must ensure that the information is not false or misleading.  For example, a dealer would violate Rule G-17 if it were to inform a customer that investment in the college savings plan of the customer’s own state did not provide the customer with any state tax or other benefit when the dealer knows or has reason to know that such benefit likely would be available.  A dealer also would violate Rule G-17 if it were to inform a customer that investment in the college savings plan of another state would provide the customer with the same tax or other 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.

  If the draft interpretive guidance is adopted, the MSRB would expect to withdraw the portions of the 2002 MSRB Notice relating to such Rule G-17 point-of-sale disclosure obligation.  The MSRB seeks comments on all aspects of the draft interpretive guidance.

 

        * * * * *

 

Comments from all interested parties are welcome.  Comments should be submitted no later than September 15, 2004 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.

June 10, 2004

        * * * * *

 

TEXT OF DRAFT AMENDMENTS TO RULE G-21[24]

 

Rule G-21.  Advertising.

(a)-(c) No change.

(d) New Issue Advertisements. In addition to the requirements of section (c), all advertisements for new issue municipal securities (other than municipal fund securities) shall also be subject to the following requirements:

(i)-(ii) No change.

(e) [NEW SECTION] 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) must include a statement that advises an investor to consider the investment objectives, risks, and charges and expenses associated with the municipal fund securities before investing; explains that more information about the securities is available in the issuer’s official statement; identifies a source from which an investor may obtain an official statement; and states that the official statement should be read carefully before investing.  In addition, the following disclosures must be included, as applicable:

(1) if the advertisement relates to municipal fund securities issued by a qualified tuition program under Internal Revenue Code Section 529, a statement that advises an investor to consider, before investing, whether the investor’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.

(2) if the advertisement is for a municipal fund security that the issuer holds out as having the characteristics of a money market fund, statements to the effect that an investment in the security is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency (unless such guarantee is provided by or on behalf of such issuer) and, if the security is held out as maintaining a stable net asset value, that although the issuer seeks to preserve the value of the investment at $1.00 per share or such other applicable fixed share price, it is possible to lose money by investing in the security.

(B) 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; and

(2) if a sales load or any other nonrecurring fee is charged, the maximum amount of the load or fee and, if the sales load or fee is not reflected in the performance data included in the advertisement, a statement that the performance data does not reflect the deduction of the sales load or fee and that the performance data would be lower if such load or fee were included.

(C) must present the statements required by clauses (A) and (B) of this paragraph, when in a print advertisement, in a type size at least as large as and of a style different from, but at least as prominent as, that used in the major portion of the advertisement, provided that when performance data is presented in a type size smaller than that of the major portion of the advertisement, the statements required by clause (B) of this paragraph may appear in a type size no smaller than that of the performance data.  If an advertisement is delivered through an electronic medium, the legibility requirements for the statements required by clauses (A) and (B) of this paragraph relating to type size and style may be satisfied by presenting the statements in any manner reasonably calculated to draw investor attention to them.  In a radio or television advertisement, the statements required by clauses (A) and (B) of this paragraph must be given emphasis equal to that used in the major portion of the advertisement.  The statements required by clause (B) of this paragraph must be presented in close proximity to the performance data and, in a print advertisement, must be presented in the body of the advertisement and not in a footnote unless the performance data appears only in such footnote.

(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) to the extent that information necessary to calculate performance data is not available from an applicable balance sheet included in a registration statement, or from a prospectus, the broker, dealer or municipal securities dealer shall use information derived from the issuer’s official statement, otherwise made available by the issuer or its agents, or (when unavailable from the official statement, the issuer or the issuer’s agents) derived from such other sources which the broker, dealer or municipal securities dealer reasonably believes are reliable;

(B) if the issuer first began issuing the municipal fund securities fewer than one, five, or ten years prior to the date of the submission of the advertisement for publication, such shorter period shall be substituted for any otherwise prescribed longer period in connection with the calculation of average annual total return or any similar returns;

(C) performance data shall be calculated as of 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 reasonably available to the broker, dealer or municipal securities dealer as described in clause (A) of this paragraph;

(D) where such calculation is required to include expenses accrued under a plan adopted under Investment Company Act Rule 12b-1, the broker, dealer or municipal securities dealer shall include all such expenses as well as any expenses having the same characteristics as expenses under such a plan where such a plan is not required to be adopted under said Rule 12b-1 as a result of Section 2(b) of the Investment Company Act of 1940;

(E) notwithstanding any of the foregoing, this paragraph shall apply solely to the calculation of performance relating to municipal fund securities and does not apply to, or limit the applicability of any rule of the Commission, NASD or any other regulatory body relating to, the calculation of performance for any security held as an underlying asset of the municipal fund securities.

(iii) 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.  An advertisement that identifies a specific municipal fund security must include the name of the issuer, presented in a manner no less prominent than any other entity identified in the advertisement, and must not imply that a different entity is the issuer of the municipal fund security.  An advertisement must not raise an inference that, because municipal fund securities are issued under a government-sponsored plan, investors are guaranteed against investment losses if no such guarantee exists.  If an advertisement concerns a specific class or category of an issuer’s municipal fund securities (e.g., A shares versus B shares; direct sale shares versus advisor shares; in-state shares versus national shares; etc.), this must clearly be disclosed in a manner no less prominent than the information provided with respect to such class or category.

(iv) Capacity of dealer and other parties.  An advertisement that relates to or describes services provided with respect to municipal fund securities must clearly indicate the entity providing those services.  An advertisement soliciting purchases of municipal fund securities that would be effected by a broker, dealer or municipal securities dealer or any other entity other than the broker, dealer or municipal securities dealer that publishes the advertisement must clearly state which entity would effect the transaction.

(v) Tax consequences and other features.  Any discussion of tax implications or other benefits or features of investments in municipal fund securities included in an advertisement must not be false or misleading.  In the case of an advertisement that includes statements regarding tax or other benefits offered under state or federal law, the advertisement must make clear the nature of such benefits and that the availability of such benefits may be materially limited based upon residency, purpose for or timing of share redemptions, or other factors, as applicable, which limitations must be described in the advertisement and presented in close proximity to, and in a manner no less prominent than, the description of such benefits.

(vi) Underlying registered securities.  If an advertisement for a municipal fund security provides specific details of a security held as an underlying asset of the municipal fund security, the details included in the advertisement relating to such underlying security must be presented in a manner that would be in compliance with any Commission or NASD advertising rules that would be applicable if the advertisement related solely to such underlying security; provided that details of the underlying security must be accompanied by any further statements relating to such details as are necessary to ensure that the inclusion of such details does not cause the advertisement to be false or misleading with respect to the municipal fund securities advertised.  This paragraph does not limit the applicability of any rule of the Commission, NASD or any other regulatory body relating to advertisements of securities other than municipal fund securities, including advertisements that contain information about such other securities together with information about municipal securities. [END NEW SECTION]

(f) (e) No change.

        * * * * *

The text of SEC Rule 482 is available at http://www.sec.gov/rules/final/33-8294.htm.

 

SEC Form N-1A is available at http://www.sec.gov/about/forms/formn-1a.pdf.

 

SEC Form N-3 is available at http://www.sec.gov/about/forms/formn-3.pdf.

 

SEC Form N-4 is available at http://www.sec.gov/about/forms/formn-4.pdf.


[1]            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.  So-called “pre-paid tuition plans” established by states or higher education institutions under Section 529(b)(A)(i) of the Internal Revenue Code generally are not considered municipal fund securities.

[2]           Many municipal fund securities are marketed directly to customers by issuer personnel, rather than through dealers.  Since the MSRB’s rulemaking authority under Section 15B of the Securities Exchange Act of 1934 is limited to dealer transactions in municipal securities, MSRB rules do not apply to issuers or their personnel who market municipal fund securities directly to customers.

[3]           The rule also establishes standards for advertising initial reoffering prices or yields of new issue municipal securities under section (d).  This provision is designed for advertisements by underwriting syndicates for municipal debt offerings and does not deal with matters relevant to the municipal fund securities markets.  The draft amendments would explicitly exempt municipal fund security advertisements from this provision.

[4]           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 the security), the dealer must include any information necessary to ensure that the advertisement is not materially false or misleading with respect to the feature. See Rule G-21 Interpretive Letter – Disclosure obligations, May 21, 1998, reprinted in MSRB Rule Book.

[5]            Program disclosure documents, information statements and other issuer-prepared disclosure materials used in connection with municipal fund securities are referred to as “official statements” under MSRB and SEC rules.  See infra footnote 13.  The MSRB has no regulatory authority over issuer disclosure documents.

[6]           See Rule G-21 Interpretation – Application of Fair Practice and Advertising Rules to Municipal Fund Securities, May 14, 2002, reprinted in MSRB Rule Book.  The 2002 MSRB Notice also confirmed previous guidance on advertisements of municipal fund securities published in 2001.  See Rule G-30 Interpretation – Interpretive Notice on Commissions and Other Charges, Advertisements and Official Statements Relating to Municipal Fund Securities, December 19, 2001, reprinted in MSRB Rule Book.

[7]           SEC Rule 482 references Form N-1A (registration statement for open-end management investment companies), Form N-3 (registration statement for variable annuities registered as investment companies) and Form N-4 (registration statement for variable annuities registered as unit investment trusts).

[8]           See Investment Company Act Release No. 25575 (May 17, 2002), 67 FR 36712 (May 24, 2002).  The proposed amendments were ultimately adopted by the SEC, with limited modifications, in September 2003 and became fully effective for mutual fund advertisements submitted for publication after March 31, 2004.  See Investment Company Act Release No. 26195 (September 29, 2003), 68 FR 57760 (October 6, 2003).

[9]           Thus, asset-based charges paid to the program manager or investment advisor, to the issuer or its agents, or to any other party generally would be viewed as being 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.

[10]          As noted above, SEC Rule 482 incorporates the calculation methods set forth in Forms N-1, N-3 and N-4 for purposes of calculating the various types of quotations described in the rule. The MSRB seeks comments on whether, as the draft amendment to Rule G-21(e)(ii) is formulated, it would be clear which SEC registration form would be applicable to each type of municipal fund security structure in existence or whether any of the specified registration forms should be excluded for purposes of draft section (e)(ii).

[11]          The 2002 MSRB Notice already requires this disclosure, as described above.

[12]          Under the 2002 MSRB Notice, similar disclosures might be required depending on the facts and circumstances, as described above.

[13]          SEC Rule 15c2-12 provides, among other things, that the underwriter for most primary offerings of municipal securities must obtain and review the issuer’s near-final official statement before purchasing or offering the securities, contract with the issuer to receive copies of the final official statement within specified timeframes after the final agreement to purchase or offer the securities, and distribute copies of the official statement to potential customers upon request.  For purposes of the rule, a final official statement must set forth information concerning the terms of the issue; information, including financial or operating data, concerning the issuer and other entities, enterprises, funds, accounts and other persons material to an evaluation of the offering; and a description of undertakings regarding the provision of secondary market information, as well as disclosure of any failures to provide such information during the past five years.

[14]          This is similar to the disclosure that is required on a customer-by-customer basis pursuant to the 2002 MSRB Notice under a dealer’s Rule G-17 point-of-sale disclosure obligation in the case of sales to a customer of college savings plan interests issued by a state other than the customer’s home state, as more fully described below.  However, it is broadened to refer not only to state tax benefits but also to other benefits that may be provided under state law (e.g., lower fees, matching grants, scholarships to state colleges, or other financial benefits).  As described below, the MSRB is proposing to expand the point-of-sale disclosure requirement to also reference the possible existence of other non-tax state benefits.

[15]          Product information is provided at www.msrb.org/msrb1/mfs/mfs529csp.asp and information for investors is provided at www.msrb.org/msrb1/mfs/ruleinfo.asp.

[16]          For example, the general disclosure for a college savings plan advertisement might include a statement that general information about investing in college savings plans is available on-line at http://about529s.msrb.org.

[17]          The draft amendment would modify the existing interpretive guidance by requiring that the disclosure that an advertisement concerns a specific class of securities be presented in the specified manner.

[18]          The draft amendment would modify the existing interpretive guidance by extending the applicability of the language to discussions of other benefits or features in addition to tax-related matters.

[19]          The draft amendment would modify the existing interpretive guidance by providing specific examples of certain limitations on benefits.  For example, if an advertisement notes that investors in a particular college savings plan may qualify for scholarships or matching grants, the advertisement may also need to state that such scholarships or matching grants are available only for attendance at in-state colleges or to in-state investors, if that is in fact the case.  The draft amendment also would modify the existing interpretive guidance by requiring that such limitations be presented in the specified manner.

[20]          The draft amendment would modify the existing language of the interpretive guidance to explicitly state that further clarifying information may need to be included to ensure that the advertisement is not false or misleading.  Because Rule G-21 already requires that advertisements not be false or misleading, this would not be a new principle under the rule.

[21]          This language, which does not appear in the existing interpretive language, recognizes that other regulatory organizations may apply their own rules to the extent of their regulatory jurisdiction.  See, e.g., NASD Special Notice to Members 03-17 – Sales Material for Municipal Fund Securities, March 25, 2003.

[22]          See Rule G-17 Interpretation – Interpretive Notice Regarding Rule G-17, on Disclosure of Material Facts, March 20, 2002, reprinted in MSRB Rule Book.

[23]          Since dealers could not reasonably be expected to become expert in state tax laws throughout the country, the MSRB noted that such disclosure, coupled with a suggestion that the customer consult a tax adviser about any state tax consequences of the investment, would provide adequate notice of the potential loss of in-state tax benefits.  The MSRB observed, however, that if the dealer proceeded to provide information about state tax consequences, it must ensure under Rule G-17 that the information is not false or misleading.

[24]            Underlining signifies insertions; strikethrough signifies deletions.

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