MSRB Notice 2007-18 (June 5, 2007)

MSRB Advertising Amendments and Interpretation Relating to Municipal Fund Securities Approved By SEC

Amendments to Municipal Securities Rulemaking Board (“MSRB”) Rule G-21, on advertising, and MSRB Rule G-27, on supervision, and an MSRB interpretation (the “Interpretive Notice”) on general advertising disclosures, blind advertisements and annual reports relating to municipal fund securities, including interests in 529 college savings plans, have been approved by the Securities and Exchange Commission (“SEC”).[1]  The amendments and Interpretive Notice became effective on June 5, 2007, except that brokers, dealers and municipal securities dealers (“dealer”) will not be required to implement the new provisions of Rule G-21(e)(i)(A)(3) and (4)(a)(iii) relating to disclosure of maximum sales load and total annual operating expense ratio (as well as the related provisions of Rule G-21(e)(ii)(A), G-21(e)(vii) and G-27(d)(ii)) for any advertisement submitted or caused to be submitted for publication, or any advertisement or correspondence otherwise distributed to the public, prior to July 15, 2007.

DESCRIPTION OF AMENDMENTS AND INTERPRETIVE NOTICE

General Provisions

Definition of Advertisement.  The definition of “advertisement” in Rule G-21(a)(i) is amended to more closely conform it to the terms “advertisement” and “sales literature” under NASD Rule 2210(a)(1) and (2) and is intended to be as inclusive as these two terms are used under NASD and SEC rules, except as otherwise specifically provided in Rule G-21(a)(i).  Thus, the reference in the definition of advertisement to any electronic or other public media should be read as broadly as in the definition of advertisement under NASD Rule 2210(a)(1), even though the definition set forth in Rule G-21(a)(i) does not include the list of media that currently or in the future may appear in the NASD definition.

In addition, the Interpretive Notice provides guidance to the effect that, in circumstances where a dealer may be required by state law or rules and regulations to prepare or distribute an annual financial report or other similar information regarding a municipal fund securities program, such report or information will not be treated as an advertisement so long as the dealer provides such report or information solely in the manner required by such state law or rules and regulations.  The MSRB does not view the expression “rules and regulations adopted by the state or an instrumentality thereof governing a particular 529 college savings plan or other municipal fund security program,” as used in the Interpretive Notice, as limiting the types of requirements to which the Interpretive Notice is applicable solely to those promulgated pursuant to a specific formal administrative rulemaking process.  Instead, the MSRB generally views the interpretation as applicable where the state or instrumentality thereof establishes a mandate of general applicability to, and binding upon, any equally situated person or entity.  However, a negotiated contractual provision would not be viewed as such a requirement since this would permit dealers to avoid the appropriate application of Rule G-21 to promotional materials through narrowly tailored contractual arrangements.

Definition of Form Letter.  The new definition of “form letter” in Rule G-21(a)(ii) is consistent with Rule 24b-1 under the Investment Company Act of 1940, as amended, but clarifies that a form letter includes both written letters (including post cards and similar mailings) and electronic mail messages.  To the extent that information not required under or not reasonably contemplated by MSRB Rule G-15(a), on customer confirmations, to appear in a traditional confirmation or periodic statement is included in, is physically attached to or otherwise accompanies (e.g., in a separate writing or data file) a confirmation or periodic statement, the determination of whether such additional information would be treated as a form letter under Rule G-21(a)(ii) generally is  based on a consideration of the specific nature of such additional information and any other relevant facts and circumstances.

Definitions of Professional and Product Advertisements. Definitions for “professional advertisement” and “product advertisement” are set forth in Rule G-21(b)(i) and (c)(ii), respectively.  This definition of professional advertisement does not effect a change in how such term has been viewed historically under the rule, while the definition of product advertisement clarifies that it applies to advertisements of specific municipal securities or advertisements that discuss specific features of municipal securities, rather than to advertisements that may merely mention general categories of municipal securities.

Content Standards for Advertisements.  The content standard for professional advertisements under Rule G-21(b)(ii) is unchanged, as is the baseline standard for product advertisements under Rule G-21(c)(ii).[2]  Rule G-21(a)(iii) establishes a general content standard for advertisements that are neither professional advertisements nor product advertisements.  This standard is the same as the baseline content standard for product advertisements.

The MSRB emphasizes that all advertisements, regardless of category, are subject to the MSRB’s basic fair dealing rule, Rule G-17, which requires each dealer, in the conduct of its municipal securities activities, to deal fairly with all persons, and prohibits the dealer from engaging in any deceptive, dishonest or unfair practice.

Generic and Blind Advertisements for Municipal Fund Securities

Generic Advertisements.  A generic advertisement of municipal fund securities that meets the requirements of Rule G-21(e)(i)(B)(1) is not required to include the general disclosures under Rule G-21(e)(i)(A).  A generic advertisement under Rule G-21(e)(i)(B)(1) is any advertisement that does not refer by name to any specific investment option or portfolio offered by an issuer of municipal fund securities, but includes the name and address of the dealer or other person sponsoring the advertisement, and that is limited to any one or more of the following:

(a) explanatory information relating to municipal fund securities generally or the nature of the issuers thereof or of the programs through which they are issued, or to services offered in connection with the ownership of such securities; or

(b) the mention or explanation of municipal fund securities of different generic types or having various investment objectives; or

(c) offers, descriptions, and explanations of products and services not constituting a municipal fund security, provided that such offers, descriptions and explanations do not relate directly to the desirability of owning or purchasing a municipal fund security; or

(d) invitation to inquire for further information; provided that if an official statement is to be sent in response to an inquiry and if the sponsor of the advertisement is the underwriter for municipal fund securities for which such official statement may be supplied, the advertisement must state that such dealer is the underwriter.[3]

Blind Advertisements.  Under Rule G-21(e)(i)(B)(2), certain blind advertisements that promote an issuer and its public purpose without promoting specific municipal fund securities or identifying a dealer or its affiliates are permitted to limit basic disclosures in the same manner as generic advertisements.  A blind advertisement may not identify a dealer or any of its affiliates and must be limited to any one or more of the following:

(a) the name of an issuer of municipal fund securities; or

(b) contact information for an issuer of municipal fund securities or its agent to obtain an official statement or other information; provided that, if such agent is a dealer or dealer affiliate, no orders for municipal fund securities shall be accepted through such source unless initiated by the customer; or

(c) a logo or other graphic design of an issuer of municipal fund securities that does not directly or indirectly identify the dealer or any dealer affiliate; or

(d) a service mark, trademark or short slogan of the issuer’s general objectives that does not constitute a call to invest in municipal fund securities.

The Interpretive Notice emphasizes that a blind advertisement may not identify the dealer or its affiliate and provides guidance to dealers acting as the issuer’s agent in responding to customer inquiries and accepting customer orders made through the contact information included in a blind advertisement.  The guidance provided with regard to whether an order may have been initiated by the customer applies solely to this provision of Rule G-21 and is not intended to be determinative as to whether the dealer has recommended the transaction to the customer for purposes of MSRB Rule G-19, on suitability of recommendations and transactions, since, depending on the facts and circumstances, the customer may have initiated the order based on a recommendation from the dealer.

In addition, blind advertisements under Rule G-21(e)(i)(B)(2) are excepted from the requirement in Rule G-21(e)(iv) to include the dealer’s capacity since the dealer is not identified in blind advertisements.

Performance Data for Municipal Fund Securities

Disclosure of Fees and Expenses in Advertisements and Correspondence.  Rule G-21(e)(i)(A)(3)(b) and (c) requires that advertisements containing performance data for municipal fund securities disclose the maximum amount of the sales load or other recurring fee.[4]  Such advertisement is also required to disclose the total annual operating expense ratio, except for municipal fund securities held out as having the characteristics of a money market fund.[5]  Print advertisements are required under Rule G-21(e)(i)(A)(4)(a)(iii) to include text box disclosure of this fee and expense information, which may be combined with comparative performance and fee data and disclosures provided for under section (e) of the rule.[6]  Rule G-21(e)(vii) provides that any correspondence with the public that includes performance data for municipal fund securities must comply with the performance data requirements of Rule G-21(e) as if such correspondence were a product advertisement under that section of the rule.[7]  Subsection (d)(ii) of Rule G-27, on supervision, requires that procedures relating to the review of correspondence include review for compliance with Rule G-21(e)(vii) to the extent applicable to a dealer’s business.[8]

In understanding how this provision is intended to be implemented, two basic principles apply:  (i) as the MSRB seeks to maximize the degree to which the public will be assured of receiving information that is comparable across both the municipal fund securities and investment company securities markets, the MSRB believes that the specific fee and expense information required to be disclosed under Rule G-21(e)(i)(A)(3) generally should match such information required to be disclosed under NASD Rule 2210(d)(3) and Securities Act Rule 482; and (ii) as the MSRB seeks to maximize the understandability of information received by the public about potential investments and the actual costs that an investment may entail, the MSRB believes that the specific fee and expense information required to be disclosed under Rule G-21(e)(i)(A)(3) generally should be the fees and expenses that an investor would actually incur rather than a collection of the components used to determine such actual fees and expenses.  Each advertisement or correspondence that includes performance data must be examined in light of these basic principles as applied in the context of the specific facts and circumstances.

Thus, for example, if an advertisement includes performance data for a single investment option offered under a 529 college savings plan that consists of a portfolio of securities of several underlying registered investment companies, the requirements of this provision generally could be met with the inclusion of a single fee and expense figure if such figure accurately reflects the total fees and expenses that an investor would actually incur in connection with an investment in such option, taking into consideration any program level fees and expenses as well as any fees and expenses that may be attributable to the underlying securities in the portfolio or that are otherwise payable in connection with such investment.  If such advertisement includes separate performance data for more than one investment option offered under a 529 college savings plan, the requirements of this provision generally could be met with the inclusion of a single fee and expense figure for each investment option for which performance data is shown if each such figure accurately reflects the total fees and expenses that an investor would actually incur in connection with an investment in each such option, taking into consideration any program level fees and expenses as well as any fees and expenses that may be attributable to the underlying securities in the option or that are otherwise payable in connection with such investment.

As noted above, dealers are not required to implement the new provisions of Rule G-21(e)(i)(A)(3) and (4)(a)(iii) relating to disclosure of maximum sales load and total annual operating expense ratio (as well as the related provisions of Rule G-21(e)(ii)(A), G-21(e)(vii) and G-27(d)(ii)) for any advertisement submitted or caused to be submitted for publication, or any advertisement or correspondence otherwise distributed to the public, prior to July 15, 2007.  Nonetheless, the MSRB urges dealers to implement these provisions as soon as practicable.

Disclosures Relating to Tax-Adjusted Performance Data.  Former subparagraph (2) of Rule G-21(e)(ii)(E) has been deleted to reflect the repeal of the sunset provision for many of the federal tax benefits enjoyed by 529 college savings plans.[9]

General Disclosure Requirements for Municipal Fund Securities

Substance of Disclosure.  The Interpretive Notice and the modifications to rule language in Rule G-21(e)(i)(A)(1) and (2), relating to disclosures designed to communicate basic information concerning investments in municipal fund securities, clarify that these disclosures are not legends requiring the inclusion of specific language but instead require that such information be effectively conveyed.  Thus, these disclosure requirements may be complied with if the substance of such information is effectively conveyed, regardless of the specific language used in the advertisement.[10]  In general, the context in which the information is provided is an important factor in determining whether the information is effectively conveyed.

The MSRB understands that these advertising disclosures have presented considerable challenges in the context of broadcast advertisements, such as traditional television or radio commercials with 30-second run-times or public service announcements that may have considerably shorter run-times.[11]  The Interpretive Notice provides guidance on the use of abbreviated forms of the required disclosures in time-limited broadcast advertisements.

Home State Tax Benefits.  Rule G-21(e)(i)(A)(2)(b) requires 529 college savings plan product advertisements to include disclosure to the effect that investors should consider, before investing, whether their home states offer state tax or other benefits only available for investments in the home state 529 college savings plan.  Dealers are permitted to omit such disclosures in advertisements (such as form letters, post cards, e-mails and other written or electronic mailings) concerning a state’s 529 college savings plan that are sent to, or are otherwise distributed through means that are reasonably likely to result in the advertisements being received by, only residents of such state.  The MSRB views such omission as most suitable with respect to advertisements that are delivered directly to intended recipients, and not well suited with respect to broadcast advertisements where the dealer would bear the burden of establishing that such broadcast is reasonably likely to result in the message being received only by in-state residents.

Communications with Existing Customers.  Rule G-21(e)(i)(B)(3) permits dealers to distribute form letters that omit some or all of the disclosures required under Rule G-21(e)(i)(A)(1) and (2) to existing customers who have previously invested in municipal fund securities.  Form letters sent solely to existing customers about the same or related municipal fund securities (such as municipal fund securities offered by the same tuition savings program, including but not limited to those described in a single official statement) that such customers already own may omit all of the standard disclosures under such subparagraphs (1) and (2) since that information will have previously been provided to such customers.  If the form letters relate to municipal fund securities other than, or unrelated to, the one the customer already invests in, then the disclosures under subparagraph (2) are required.  Furthermore, if the form letter identifies a source for obtaining an official statement and the dealer underwrites the municipal fund securities advertised in the form letter, the dealer is required to disclose that it is the underwriter.

Tax-Related Disclosures for Municipal Fund Securities

Rule G-21(e)(v) requires a product advertisement for municipal fund securities that discusses tax benefits to disclose that such benefits may be conditioned on meeting certain requirements.  If the nature of specific benefits is described, the factors that may materially limit their availability must be named.  Generalized statements regarding tax benefits require only a generalized statement that certain conditions may apply and, where specific benefits are described, only those substantive factors that may materially affect the ability to realize such benefits must be listed, rather than explained in full.  For example, a statement that 529 college savings plans are federally tax-advantaged, or that investors may qualify for federal tax benefits by investing in a 529 college savings plan, without identifying the specific benefits, would be viewed as generalized statements.  In such cases, a statement that certain conditions may apply, or that refers customers to the official statement for more information, would be sufficient.  Furthermore, the inclusion of the required home state tax disclosure under Rule G-21(e)(i)(A)(2)(b) does not, by itself, require the disclosure of conditions for receiving such state tax benefits.

* * * * *

Questions regarding the amendments, the Interpretive Notice and Rule G-21 in general may be directed to Ernesto A. Lanza, Senior Associate General Counsel, Jill C. Finder, Associate General Counsel, or Catherine A. Courtney, Assistant General Counsel.

June 5, 2007

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TEXT OF AMENDMENTS TO RULES G-21 AND G-27[12]

Rule G-21.  Advertising

(a) General Provisions.

(i) Definition of “Advertisement.”  For purposes of this rule, the term “advertisement” means any material (other than listings of offerings) published or used designed for use in any electronic or other the public, including electronic, media, or any written or electronic promotional literature distributed or made generally available to customers or designed for dissemination to the public, including any notice, circular, report, market letter, form letter, telemarketing script, seminar text, press release concerning the products or services of the broker, dealer or municipal securities dealer, or reprint, or any excerpt of the foregoing or of a published article. The term does not apply to preliminary official statements or official statements, but does apply to abstracts or summaries of official statements, offering circulars and other such similar documents prepared by brokers, dealers or municipal securities dealers.

(ii) Definition of “Form Letter.”  For purposes of this rule, the term “form letter” means any written letter or electronic mail message distributed to 25 or more persons within any period of 90 consecutive days.

(iii) General Standard for Advertisements.  Subject to the further requirements of this rule relating to professional advertisements and product advertisements, no broker, dealer or municipal securities dealer shall publish or disseminate, or cause to be published or disseminated, any advertisement relating to municipal securities that such broker, dealer or municipal securities dealer knows or has reason to know is materially false or misleading.

(b) Professional Advertisements.

(i) Definition of “Professional Advertisement.”  The term “professional advertisement” means No broker, dealer or municipal securities dealer shall publish or cause to be published any advertisement concerning the facilities, services or skills with respect to municipal securities of such broker, dealer or municipal securities dealer or of another broker, dealer, or municipal securities dealer,.

(ii) Standard for Professional Advertisements.  No broker, dealer or municipal securities dealer shall publish or disseminate, or cause to be published or disseminated, any professional advertisement that is materially false or misleading.

(c) Product Advertisements.

(i) Definition of “Product Advertisement.”  The term “product advertisement” means No broker, dealer or municipal securities dealer shall publish or cause to be published any advertisement concerning one or more specific municipal securities, one or more specific issues of municipal securities, the municipal securities of one or more specific issuers, or the specific features of municipal securities.

(ii) Standard for Product Advertisements.  No broker, dealer or municipal securities dealer shall publish or disseminate, or cause to be published or disseminated, any product advertisement that which such broker, dealer, or municipal securities dealer knows or has reason to know is materially false or misleading and, to the extent applicable, that is not in compliance with section (d) or (e) hereof.

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

(i)-(ii) No change.

(e) Municipal Fund Security Product Advertisements.  In addition to the requirements of section (c), all product advertisements for municipal fund securities shall be subject to the following requirements:

(i) Required dDisclosures. 

(A) Substance and Format of Disclosure.  Except as described in paragraph (B) of this subsection (i), each product Each advertisement for municipal fund securities:

(1) basic disclosure – (A) must include a statement to the effect that:

(a) (1) advises an investor should to consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing;

(b) (2) explains that more information about municipal fund securities is available in the issuer's official statement;

(c) (3) if the advertisement identifies a source from which an investor may obtain an official statement and the broker, dealer or municipal securities dealer that publishes the advertisement is the underwriter for one or more of the issues of municipal fund securities for which any such official statement may be supplied, states that such broker, dealer or municipal securities dealer is the underwriter for one or more issues (as appropriate) of such municipal fund securities; and

(d) (4) states that the official statement should be read carefully before investing.

(2) additional disclosures for identified products – (B) that refers by name (including marketing name) to any municipal fund security, issuer of municipal fund securities, state or other governmental entity that sponsors the issuance of municipal fund securities, or to any securities held as assets of municipal fund securities or to any issuer thereof, must include the following disclosures, as applicable:

(a) (1) unless the offer of such municipal fund securities is exempt from Exchange Act Rule 15c2-12 and the issuer thereof has not produced an official statement, a source from which an investor may obtain an official statement;

(b) (2) if the advertisement relates to municipal fund securities issued by a qualified tuition program under Internal Revenue Code Section 529, a statement to the effect that advises an investor should to consider, before investing, whether the investor's or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program; provided, however, that this statement shall not be required for any advertisement relating to municipal fund securities of a specific state if such advertisement is sent to, or is otherwise distributed through means that are reasonably likely to result in the advertisement being received by, only residents of such state and is not otherwise published or disseminated by the broker, dealer or municipal securities dealer, or made available by the broker, dealer or municipal securities dealer to any of its affiliates, the issuer or any of the issuer’s agents with the expectation or understanding that such other parties will otherwise publish or disseminate such advertisement; and

(c) (3) 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.

[NOTE:     Compliance with amendments to Rule G-21(e)(i)(A)(3) is required for any advertisement submitted or caused to be submitted for publication, or any advertisement or correspondence otherwise distributed to the public, on or after July 15, 2007]

(3) additional disclosures concerning performance – (C) that includes performance data must include:

(a) (1) a legend disclosing that the performance data included in the advertisement represents past performance; that past performance does not guarantee future results; that the investment return and the value of the investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost; and that current performance may be lower or higher than the performance data included in the advertisement.  Unless the advertisement includes total return quotations current to the most recent month ended seven business days prior to the date of any use of the advertisement, the legend must also identify either a toll-free (or collect) telephone number or a website where an investor may obtain total return quotations current to the most recent month-end for which such total return, or all information required for the calculation of such total return, is available; and

(b) (2) if a sales load or any other nonrecurring fee is charged, the maximum amount of the load or fee (current as of the date such advertisement is submitted for publication or otherwise disseminated) 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.; and

(c) to the extent that such performance data relates to municipal fund securities that are not held out as having the characteristics of a money market fund and to the extent applicable, the total annual operating expense ratio of such municipal fund securities (calculated in the same manner as the total annual fund operating expenses required to be included in the registration statement for a registered investment company, subject to paragraph (e)(ii)(A) hereof), gross of any fee waivers or expense reimbursements.

(4) format of disclosure – (D) must meet the following requirements:

(a) for a print advertisement:

(i) present the statements required by subparagraphs (1), (2) and (3) clauses (A), (B) and (C) of this paragraph (A) must be presented, 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 subparagraph (3) clause (C) of this paragraph may appear in a type size no smaller than that of the performance data.;

(ii) the statements required by subparagraph (3) of this paragraph must be presented in close proximity to the performance data; provided that such statements must be presented in the body of the advertisement and not in a footnote unless the performance data appears only in such footnote; and

[NOTE:     Compliance with new Rule G-21(e)(i)(A)(4)(a)(iii) is required for any advertisement submitted or caused to be submitted for publication, or any advertisement or correspondence otherwise distributed to the public, on or after July 15, 2007]

(iii) the maximum amount of the sales load required to be disclosed pursuant to clause (3)(b) and the information required to be disclosed pursuant to clause (3)(c), along with the standardized performance information mandated by Securities Act Rule 482 as applicable by virtue of subsection (e)(ii) of this rule, must be presented in a prominent text box that contains only such information but which may also contain comparative performance and fee data and disclosures required under this section (e).

(b) for If an advertisement is delivered through an electronic medium:,

(i) the legibility requirements for the statements required by subparagraphs (1), (2) and (3) clauses (A), (B) and (C) 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;.

(ii) if such advertisement is In a radio or television advertisement, the statements required by subparagraphs (1), (2) and (3) clauses (A), (B) and (C) of this paragraph must be given emphasis equal to that used in the major portion of the advertisement; and.

(iii) the The statements required by subparagraph (3) clause (C) 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.

(B)  Exceptions from Certain Disclosure Requirements.  Notwithstanding any other provision of this rule, the following advertisements relating to municipal fund securities shall not be subject to the provisions of subparagraphs (1) and (2) of paragraph (e)(i)(A):

(1) generic advertisements – any advertisement that does not refer by name to any specific investment option or portfolio offered by an issuer of municipal fund securities, but includes the name and address of the broker, dealer or municipal securities dealer or other person sponsoring the advertisement, and that is limited to any one or more of the following:

(a) explanatory information relating to municipal fund securities generally or the nature of the issuers thereof or of the programs through which they are issued, or to services offered in connection with the ownership of such securities; or

(b) the mention or explanation of municipal fund securities of different generic types or having various investment objectives; or

(c) offers, descriptions, and explanations of various products and services not constituting a municipal fund security, provided that such offers, descriptions, and explanations do not relate directly to the desirability of owning or purchasing a municipal fund security; or

(d) invitation to inquire for further information; provided that if an official statement for municipal fund securities is to be sent or delivered in response to such inquiries and if the sponsor of the advertisement is the underwriter for one or more of the issues of municipal fund securities for which such official statement may be supplied, the advertisement must state that such broker, dealer or municipal securities dealer is the underwriter for one or more issues (as appropriate) of such municipal fund securities.

(2) certain blind advertisements – any advertisement that does not identify a broker, dealer or municipal securities dealer or any affiliate of a broker, dealer or municipal securities dealer and that is limited to any one or more of the following:

(a) the name of an issuer of municipal fund securities; or

(b) contact information for an issuer of municipal fund securities or for any agent of such issuer to obtain an official statement or other information; provided that, if any such agent of the issuer is a broker, dealer or municipal securities dealer or an affiliate of a broker, dealer or municipal securities dealer, no orders for municipal fund securities shall be accepted through such source unless initiated by the customer; or

(c) a logo or other graphic design of an issuer of municipal fund securities that does not directly or indirectly identify the broker, dealer or municipal securities dealer or any affiliate of the broker, dealer or municipal securities dealer; or

(d) a service mark, trademark or short slogan of the issuer’s general objectives that does not constitute a call to invest in municipal fund securities.

(3) certain form letters to existing customers – any form letter relating to municipal fund securities distributed solely to existing customers of the broker, dealer or municipal securities dealer to whom the broker, dealer or municipal securities dealer has previously sent or caused to be sent an official statement for:

(a) any municipal fund securities of the issuer of such municipal fund securities; or

(b) any municipal fund securities of a different issuer of municipal fund securities, provided that the advertisement includes the applicable disclosures under clause (e)(i)(A)(1)(c) and subparagraph (e)(i)(A)(2) of this rule.

(ii) Performance dData.  Each product 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) and, to the extent applicable, subparagraph (e)(i)(A)(4) of this rule, provided that:

[NOTE:     Compliance with amendments to Rule G-21(e)(ii)(A) is required for any advertisement submitted or caused to be submitted for publication, or any advertisement or correspondence otherwise distributed to the public, on or after July 15, 2007]

(A) source of data – to the extent that information necessary to calculate performance data or to determine loads, fees and expenses for purposes of clause (e)(i)(A)(3)(b) or (c) 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) period of calculation – 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) currentness of calculation – performance data and total annual operating expense ratio shall be calculated as of the most recent practicable date considering the type of municipal fund securities and the media through which data will be conveyed, except that any advertisement containing total return quotations will be considered to have complied with this paragraph provided that:

(1)     (a) the total return quotations are current to the most recent calendar quarter ended prior to the submission of the advertisement for publication for which such performance data, or all information required for the calculation of such performance data, is available to the broker, dealer or municipal securities dealer as described in paragraph clause (A) of this subsection (e)(ii) paragraph; and

(b) total return quotations (current to the most recent month ended seven business days prior to the date of any use of the advertisement for which such total return, or all information required for the calculation of such total return, is available to the broker, dealer or municipal securities dealer as described in paragraph clause (A) of this subsection (e)(ii) paragraph) are provided at the toll-free (or collect) telephone number or website identified pursuant to clause (i)(A)(3)(a) paragraph (i)(C)(1) of this section (e) and the month to which such information is current is identified; or

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

(D) 12b-1-type plans – 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) tax-adjusted calculations – in calculating tax-equivalent yields or after-tax returns, the broker, dealer or municipal securities dealer shall assume that any unreinvested distributions are used in the manner intended with respect to such municipal fund securities in order to qualify for any federal tax-exemption or other federally tax-advantaged treatment with respect to such distributions, provided that: (1) the advertisement must also provide a general description of how federal law intends that such distributions be used and disclose that such yield or return would be lower if distributions are not used in this manner.; and (2) if the then-effective federal income tax treatment upon which such yield or return was 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 then-effective federal income tax treatment is not extended or otherwise changed.

(F) applicability with respect to underlying assets – notwithstanding any of the foregoing, this subsection (e)(ii) 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 iIssuer and sSecurity.  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 (or the issuer's marketing name for its issuance of municipal fund securities, together with the state 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 dDealer and oOther pParties.  An advertisement that relates to or describes services provided with respect to municipal fund securities must clearly indicate the entity providing those services.  If any person or entity other than the broker, dealer or municipal securities dealer is named in the advertisement, the advertisement must reflect any relationship between the broker, dealer or municipal securities dealer and such other person or entity.  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 identify which entity would effect the transaction, provided that the advertisement may identify one or more such entities in general descriptive terms but must specifically name any such other entity if it is the issuer, an affiliate of the issuer, or an affiliate of the broker, dealer or municipal securities dealer that publishes the advertisement.  This subsection (iv) shall not apply to any advertisement described in subparagraph (e)(i)(B)(2) of this rule.

(v) Tax cConsequences and oOther fFeatures.  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 generalized statements regarding tax or other benefits offered in connection with such municipal fund securities or otherwise offered under state or federal law, the advertisement also must include a generalized statement state that the availability of such tax or other benefits may be conditioned on meeting certain requirements.  If the advertisement describes the nature of specific benefits, such advertisement must also briefly list name the substantive factors that may materially limit the availability of such benefits (such as residency, purpose for or timing of distributions, or other factors, as applicable).  Such statements of conditions or limitations must be presented in close proximity to, and in a manner no less prominent than, the description of such benefits.

(vi) Underlying rRegistered sSecurities.  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 subsection 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.

[NOTE:     Compliance with new Rule G-21(e)(vii) is required for any correspondence presenting performance data distributed to the public on or after July 15, 2007]

(vii) Correspondence Presenting Performance Data.  Notwithstanding any other provision of this rule, all correspondence with the public that includes performance data relating to municipal fund securities must comply with the provisions of subparagraph (e)(i)(A)(3) (presented in the manner provided in subparagraph (e)(i)(A)(4)) and subsection (e)(ii) as if such correspondence were a product advertisement under this rule.

(f) No change.

* * * * *

Rule G-27.  Supervision

[NOTE:     Compliance with amendment to Rule G-27(d)(ii) is required on or after July 15, 2007, to the extent applicable to a dealer’s business]

(a)-(c) No change.

(d) Review of Correspondence

(i) No change.

(ii) Review of correspondence.  Each dealer shall develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing written (i.e., non-electronic) and electronic correspondence with the public relating to its municipal securities activities, including review for compliance with Rule G-21(e)(vii) to the extent applicable to such dealer’s business.  Procedures shall include the review of incoming, written correspondence directed to municipal securities representatives and related to the dealer’s municipal securities activities to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with the dealer’s procedures. Where such procedures for the review of correspondence do not require review of all correspondence prior to use or distribution, they must include provisions for the education and training of associated persons as to the dealer's procedures governing correspondence; documentation of such education and training; and surveillance and follow-up to ensure that such procedures are implemented and adhered to.

(iii) No change.

(e) No change.

* * * * *

TEXT OF INTERPRETIVE NOTICE

Interpretation on General Advertising Disclosures, Blind Advertisements and Annual Reports Relating to Municipal Fund Securities under Rule G-21

Rule G-21, on advertising, establishes specific requirements for advertisements by brokers, dealers and municipal securities dealers (“dealers”) of municipal fund securities, including but not limited to advertisements for 529 college savings plans (“529 plans”).  This notice sets forth interpretive guidance under Rule G-21 with respect to time-limited broadcast advertisements, blind advertisements, and annual reports or other similar information required to be distributed under state mandates.

General Disclosures in Time-Limited Broadcast Advertisements

Rule G-21(e)(i)(A) requires certain basic disclosures to be provided in product advertisements for municipal fund securities.  These disclosures are not legends requiring the inclusion of specific language.  Rather, these disclosure requirements may be complied with if the substance of such information is effectively conveyed, regardless of the specific language used in the advertisement.  In general, the context in which the information is provided is an important factor in determining whether the information is effectively conveyed.

These required disclosures may present challenges in the context of broadcast advertisements, such as traditional television or radio commercials with 30-second run-times or public service announcements with shorter run-times.  In the context of time-limited broadcast advertisements, dealers should provide such disclosures in a manner that appropriately balances the intended message with the required disclosures.  Given the unique nature of broadcast advertisements, where the oral presentation of more information can often result in a decreased likelihood that the central message of such information will be understood and retained, somewhat abbreviated forms of the required disclosures may be appropriate for such time-limited broadcast advertisements, particularly if the disclosures are made with close attention paid to ensuring that they are presented with equal prominence to the remainder of the message.

Thus, for example, in a time-limited broadcast advertisement for a non-money market 529 plan, the following language, spoken in a manner consistent with the remaining oral presentation of information, generally would satisfy the disclosure requirements of Rule G-21(e)(i)(A):  “To learn about [529 plan name], its investment objectives, risks and costs, read the official statement available from [source].  Check with your home state to learn if it offers tax or other benefits for investing in its own 529 plan.”  Further, in a time-limited television advertisement, the source for the official statement, together with a contact telephone number or web address, generally could be displayed on screen while other portions of the disclosures are spoken.  This example is intended to be illustrative and is not intended to be exclusive or to necessarily establish a baseline for disclosure.

Blind Advertisements

Under Rule G-21(e)(i)(B)(2), certain product advertisements for municipal fund securities that promote an issuer and its public purpose without promoting specific municipal fund securities or identifying a dealer or its affiliates may omit the general disclosures otherwise required under Rule G-21(e)(i)(A).  Among other things, such a blind advertisement may include contact information for the issuer or an agent of the issuer to obtain an official statement or other information, provided that if such issuer’s agent is a dealer or dealer affiliate, no orders may be accepted through such source unless initiated by the customer.  Although the contact information may direct a potential customer to a dealer or its affiliate acting as agent of the issuer, the face of the advertisement may not identify such dealer or affiliate.

For example, a blind advertisement may say “call 1-800-xxx-xxxx for more information” or “go to www.[state-name]-529plan.com for more information” but may not say “call [dealer name] at 1-800-xxx-xxxx for more information” or “go to www.[dealer-name]-529plan.com for more information.”  This provision does not preclude the person who answers a phone inquiry, or the website to which the URL links, from identifying the dealer or its affiliate, so long as such dealer or affiliate is clearly disclosed to be acting on behalf of the issuer identified in the advertisement.

If a potential customer initiates an order through the source identified in the advertisement, a distinct barrier between the providing of information and the seeking of orders must be maintained to qualify as a blind advertisement.  For example, solely for purposes of Rule G-21(e)(i)(B)(2), a dealer may establish that the customer initiated the order by requiring, in the case of a telephone inquiry, that the customer be transferred from the initial dealer contact person to a different person before the customer provides any information used in connection with an order or, in the case of a web-based inquiry, that the customer navigate from the initial webpage referred to in the advertisement to another page on the same or different web site before entering any information used in connection with an order.[1]  Of course, the dealer must be mindful of its obligation under Rule G-17, on fair practice, to provide to the customer, at or prior to the time of trade, 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, regardless of whether the transaction was recommended or whether an order may be characterized as unsolicited.[2]  In addition, if the transaction is recommended, the dealer must fulfill its obligations with respect to suitability under Rule G-19, on suitability of recommendations and transactions.[3]

Required Annual Reports Excluded from Definition of Advertisement

In some cases, a dealer may be required, by state law or the rules and regulations adopted by the state or an instrumentality thereof governing a particular 529 plan or other municipal fund security program, to prepare or distribute an annual financial report or other similar information regarding such plan or program.  So long as a dealer provides any such required report or information with respect to a 529 plan or other municipal fund securities program solely in the manner required by such state law or rules and regulations, such report or information will not be treated as an advertisement for purposes of Rule G-21.[4]  However, the dealer would remain subject to Rule G-17, which requires that the dealer deal fairly with all persons, prohibits the dealer from engaging in any deceptive, dishonest or unfair practice and requires the dealer to provide to its customer, at or prior to the time of trade, all material facts about a transaction known by the dealer or that are reasonably accessible to the market.  In addition, if such information is used in any manner beyond what is narrowly required by such law, rules or regulation, such use of the information would become subject to Rule G-21 as an advertisement.[5]

__________________

Footnotes to Interpretation

[1] These methods are not intended to be the exclusive means by which a dealer could establish that the customer initiated the order.

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

[3] See Rule G-17 Interpretation – Interpretation on Customer Protection Obligations Relating to the Marketing of 529 College Savings Plans, August 7, 2006, reprinted in MSRB Rule Book.

[4] If such information is distributed through the official statement, then it would not be considered an advertisement by virtue of the exclusion of official statements from the definition of “advertisement” in Rule G-21(a)(i).

[5] This guidance is consistent with similar guidance provided by NASD with respect to its advertising rule, Rule 2210, as applied to certain performance information and hypothetical illustrations required by state laws to be provided by dealers in connection with retirement investments and variable annuity contracts.  See letter dated November 29, 2004, to Therese Squillacote, Chief Compliance Officer, ING Financial Advisers, LLC, from Philip A. Shaikun, Assistant General Counsel, NASD; letter dated September 30, 2002, to Sally Krawczyk, Esq., Sutherland, Asbill & Brennan, LLP, from Mr. Shaikun; and letter dated February 5, 1999, to W. Thomas Conner, Vice President, Regulatory Affairs, National Association of Variable Annuities, from Robert J. Smith, Office of General Counsel, NASD Regulation, Inc.

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