[Federal Register: May 14, 2003 (Volume 68, Number 93)]
[Notices]
[Page 25918-25923]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14my03-91]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47815; File No. SR-MSRB-2003-03]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to
Marketing of 529 College Savings Plans in the Workplace
May 8, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'') and rule 19b-4 thereunder,\1\ notice is hereby
given that on April 29, 2003, the Municipal Securities Rulemaking Board
(the ``MSRB'') filed with the Securities and Exchange Commission (the
``Commission'') a proposed rule change (File No. SR-MSRB-2003-03) (the
``proposed rule change'') described in items, I, II, and III below,
which items have been prepared by the MSRB. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4 thereunder.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB has filed with the Commission a proposed rule change
consisting of an interpretive notice on marketing by brokers, dealers
and municipal securities dealers (``dealers'') of 529 college savings
plans in the workplace. The entire text of the proposed rule change
appears at the end of this notice.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
item IV below. The MSRB has prepared summaries, set forth in sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(1) Purpose
The MSRB has received a number of requests for guidance on dealer
responsibilities under MSRB rules with respect to the marketing of 529
college savings plans (a type of state program that issues municipal
fund securities) through the workplace to employees. Such workplace
marketing programs raise unique interpretive issues under MSRB rules.
The MSRB has determined to provide interpretive guidance on the
application of rule G-8, on recordkeeping, rule G-17, on fair dealing,
rule G-19, on suitability, rule G-27, on supervision, and rule G-32, on
disclosure, in the context of workplace marketing programs relating to
529 college savings plans.
(2) Basis
The MSRB believes that the proposed rule change is consistent with
section 15B(b)(2)(C) of the Exchange Act, which provides that the
MSRB's rules shall:
be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to, and facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market
in municipal securities, and, in general, to protect investors and
the public interest.
The MSRB believes that the proposed rule change will provide guidance
to dealers engaged in workplace marketing programs for 529 college
savings plans as to how to comply with MSRB rules in a manner that
ensures that the investor protection objectives of the rules are met.
B. Self-Regulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change will impose
any burden on competition not necessary or appropriate in furtherance
of the purposes of the Exchange Act since it would apply equally to all
dealers involved in workplace marketing programs for 529 college
savings plans.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
On November 18, 2002, the MSRB published for comment draft
interpretive notice on marketing of 529 college savings plan employee
payroll deduction programs. The MSRB received six comment letters.\2\
After reviewing these comments, the MSRB approved the draft
interpretive notice, with certain modifications, for filing with the
SEC.\3\ The comments and the MSRB's responses are discussed below.
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\2\ Letter from Robert W. Berta, Jr., Vice President--
Compliance, Countrywide Investment Services, Inc. (``Countrywide''),
to Ernesto A. Lanza, Senior Associate General Counsel, MSRB, dated
December 17, 2002; letter from M. Shawn Dreffein, President,
National Planning Corporation (``NPC''), to Ernesto A. Lanza, dated
January 7, 2003; letter from Natalie A. Kavanaugh, Legal Specialist,
Fidelity Investments (``Fidelity''), to Ernesto A. Lanza, dated
January 9, 2003; letter from Diana F. Cantor, Chair, College Savings
Plan Network (``CSPN'') and Executive Director, Virginia College
Savings Plan, to Ernesto A. Lanza, dated January 10, 2003; letter
from Stuart J. Kaswell, Senior Vice President and General Counsel,
Securities Industry Association (``SIA''), to Ernesto A. Lanza,
dated January 10, 2003; and letter from Tamara K. Salmon, Senior
Associate Counsel, Investment Company Institute (``ICI''), to
Ernesto A. Lanza, dated January 10, 2003.
\3\ After reviewing the comments, the MSRB modified the draft
interpretive guidance to: (i) Change the term ``introducing broker''
to ``selling broker;'' (ii) reflect the existence of other scenarios
in which 529 college savings plans are marketed in the workplace;
(iii) provide more guidance as to when dealers may rely on others to
fulfill regulatory responsibilities; and (iv) clarify certain
recordkeeping obligations. These revisions are described in greater
detail below.
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[[Page 25919]]
NPC fully supported the draft interpretive notice, stating that it
``clearly sets out the rationale for providing guidance in this area *
* * [and] will make it possible for our Representatives to assist
companies in offering 529 college savings plans to their employees.''
CSPN, Fidelity, ICI and SIA all generally supported the draft
interpretive notice, although each requested that the MSRB further
broaden and/or clarify the guidance in various respects.\4\
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\4\ Countrywide did not state its position regarding the draft
interpretive notice but merely noted a possible grammatical
correction.
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Fidelity, ICI and SIA requested that the MSRB substitute the term
``selling broker'' or ``selling dealer'' for the term ``introducing
broker'' used in the draft interpretive notice. They stated that the
term ``introducing broker'' is used with different meanings under the
federal securities laws applicable to other types of securities and may
cause some confusion. In addition, SIA recommended that, for purposes
of the interpretation, the term ``selling broker'' also encompass the
primary distributor where it directly establishes the relationship with
the employer. SIA stated, ``In addition to recognizing that a selling
broker rarely, if ever, has a suitability obligation in the context of
a payroll deduction program, the notice should clarify that a primary
distributor who makes 529 Plan investments available through a third-
party broker would not have a suitability obligation under rule G-19,
as it too makes no recommendation to an employee.'' The MSRB has
changed the term ``introducing broker'' to ``selling broker'' in the
revised interpretive notice. Contrary to SIA's statement that the
interpretive notice recognizes ``that a selling broker rarely, if ever,
has a suitability obligation,'' the notice does not assess the
likelihood or frequency of recommendations being made by selling
brokers. The notice does provide some guidance regarding the factors to
consider when determining whether a recommendation has occurred. The
MSRB believes that no further guidance in this area is necessary.
CSPN, Fidelity, ICI and SIA each noted that the scenario described
in the draft interpretive notice is not the only form in which dealers
may seek to market 529 college savings plans through employers. In
addition to arrangements where selling brokers having a contractual
relationship with the primary distributor to market through employers,
with the employees making investments directly through the primary
distributor (as described in the draft interpretive notice), these
commentators noted that: (1) Primary distributors may themselves market
529 college savings plans through employers; (2) selling brokers
sometimes have contractual relationships with the issuer rather than
the primary distributor; (3) selling brokers may handle employee
investments and maintain long-term relationships with employees, rather
than merely introducing employees to the primary distributor; (4)
transfer agents may undertake significant responsibilities in
connection with employees' investments; and (5) employees may in some
instances use a dealer other than the selling broker or primary
distributor to make an investment that may still be considered part of
the employer-sponsored program. These commentators requested that the
MSRB address some or all of these additional scenarios. In addition,
CSPN suggested that the MSRB make clear that the scenarios addressed in
the draft interpretive notice are illustrative and that other models
may be implemented.
The MSRB has made significant modifications to the initial
paragraphs of the notice to reflect the existence of these other
scenarios. No significant change in interpretation results from a
primary distributor acting in the role of a selling broker. The
identity of the selling broker's counterparty on the selling agreement
also does not significantly change its regulatory obligations. Selling
brokers that make recommendations remain fully obligated under MSRB
rules and remain ultimately responsible where the primary distributor
has not affirmatively undertaken regulatory obligations on behalf of
the selling broker (as discussed below). The guidance provided by the
notice is primarily intended for dealers that are formally involved in
a workplace marketing program; thus, the notice is of limited
applicability to dealers that do not have a formal role in such a
program.
Fidelity observed that the draft interpretive notice referred to
on-line enrollment with the primary distributor and noted that in many
circumstances enrollment and investments continue to be handled by
mail. Also, Fidelity, ICI and SIA noted that other forms of payment,
such as ACH (automated clearing house) bank transfers, may be used in
addition to traditional employee payroll deductions. These commentators
requested that the MSRB recognize these variants in its final notice.
The revised interpretive notice now more clearly acknowledges these
different processes.
CSPN, Fidelity, ICI and SIA sought further clarification on the
circumstances under which selling brokers may rely on other parties to
meet their regulatory obligations. CSPN and SIA stated that dealers
should be able to rely on issuers to distribute official statements to
customers. CSPN noted its concern that customers may be confused by the
receipt of redundant (and possibly out-dated) disclosure documents if
dealers must deliver official statements regardless of whether the
issuer has sent them to customers. SIA suggested that the ability of
the selling broker to rely on the primary distributor for delivery of
the official statement as provided in the draft interpretive notice be
extended to the ability to rely on other parties, such as other
dealers, employers and issuers.
The revised interpretive notice permits a selling broker to
conclusively rely on the primary distributor to meet its disclosure
obligations and certain supervisory obligations (described below) only
under the limited circumstances in which employee orders are not
accepted without actual delivery of the official statement and the
primary distributor has affirmatively agreed to undertake such
regulatory obligations on behalf of the selling broker. In such
circumstances, the primary distributor will be responsible for
fulfilling such obligations. In all other circumstances, the notice
clarifies that a selling broker may agree with another party to take
certain actions on its behalf but that if such other party fails to
take such actions, the selling broker remains responsible for
fulfilling its regulatory obligation.
ICI suggested that the MSRB should permit selling brokers to enter
into arrangements with the primary distributor to meet their
supervisory obligations to review and approve customer accounts and
transactions based upon having procedures in place that provide
assurances to the selling brokers that such review and approval is
being undertaken by the primary distributor. SIA questioned the value
of requiring a selling broker to review customer accounts and
transactions well after the transaction is executed, especially if the
transaction was not recommended. In addition, SIA questioned why a
requirement for such review and related recordkeeping would be
dependent upon whether the selling broker receives compensation for a
transaction.
[[Page 25920]]
The revised interpretive notice clarifies that, where a selling
broker does not make a recommendation and the primary distributor
affirmatively agrees to take on both the disclosure responsibilities
and the supervisory responsibilities with regard to opening of accounts
and approval of transactions, the regulatory obligation may be shifted
to the primary distributor. However, supervisory responsibility remains
with the selling broker so long as the selling broker retains any
affirmative duties to employees. The MSRB believes that the limited
recordkeeping obligations imposed on all selling brokers in the notice
are appropriate. The revised interpretive notice makes clear that the
limited recordkeeping requirements that remain for subsequent
transactions effected by the primary distributor where compensation is
paid to the selling broker applies only when such compensation is
transaction based since, depending on the facts and circumstances, this
information may be necessary to determine compliance with MSRB's fair
pricing and fair commission requirements.
With respect to transfer agents, SIA noted that many plans provide
for applications and customer orders to be sent directly to a transfer
agent, with the primary distributor's activities ``limited to managing
the overall marketing of the program and the production of marketing
and promotional materials.'' SIA stated that, ``only the transfer agent
maintains any investor records and these records are the plan's
investor records. Thus, in this model, the primary distributor's
regulatory responsibilities are limited primarily to compliance with
applicable rules governing marketing materials but not those rules
mandating customer account related procedures.'' SIA sought assurance
that primary distributors did not retain residual customer protection
obligations under MSRB rules in the scenario where applications and
orders are submitted directly to the transfer agent.
The MSRB notes that transfer agents generally are viewed under the
Exchange Act as working on behalf of the issuer but that, in the 529
college savings plan market, transfer agents also sometimes
contractually agree to act on behalf of the primary distributor. In the
revised interpretive notice, where transactions are effected through a
transfer agent without the direct involvement of the primary
distributor or the selling broker, the selling broker is permitted to
conclusively rely on the primary distributor to fulfill certain of the
selling broker's regulatory obligations only if the transfer agent has
contractually agreed to act on behalf of the primary distributor.
Otherwise, the transfer agent is effectively treated as an agent of the
issuer and the dealer that enlisted the corresponding employer to
participate in the workplace marketing plan remains ultimately
responsible for compliance with MSRB rules.
SIA asked why a selling broker would have a fair dealing obligation
under rule G-17 to an employer since the employer is not the dealer's
client. SIA also sought guidance regarding the nature of information
that a dealer would be obligated to provide to the employer under the
rule G-17 disclosure obligation. ICI and SIA also questioned the need
for the selling broker to maintain a record of the name and address of
an employer that the dealer solicited, as well as for principal review
of such solicitation. CSPN sought assurances that the fair dealing
obligation toward the employer would not give rise to any inference
that the issuer has any Federal securities law obligation to employers
under the scenario described in the draft interpretive notice.
The fair dealing requirement of rule G-17 applies, on its face, to
all persons, not just customers. The MSRB believes that it
appropriately applies to the selling broker's relationship with
employers, particularly since the selling broker is inducing the
employer to create a captive audience of investors and the employer's
agreement to participate in the program may lead employees to believe
that the employer endorses investment under the program. Under these
circumstances, it is important that selling brokers provide adequate
information regarding the program to the employer so that it can make
an informed decision with regard to enrollment in the program. The
limited recordkeeping regarding the employer required by the notice is
important in the context of documenting the ability of a selling broker
to rely on the guidance provided in the notice with respect to
particular transactions. The revised interpretive notice provides
assurances that a dealer's fair dealing obligation to the employer is
not intended to imply that the issuer has a similar legal obligation to
the employer.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
is consistent with the Exchange Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
Copies of the submissions, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of the filing will also be
available for inspection and copying at the MSRB's principal offices.
All submissions should refer to File No. SR-MSRB-2003-03 and should be
submitted by June 4, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
Interpretive Notice on Marketing of 529 College Savings Plans in the
Workplace
The Municipal Securities Rulemaking Board (``MSRB'') has received a
number of requests for interpretive guidance on the responsibilities of
brokers, dealers and municipal securities dealers (``dealers'') under
MSRB rules with respect to the marketing of 529 college savings plans
through the workplace to employees (``workplace marketing programs'').
Workplace marketing programs have been described to the MSRB as being
offered through a variety of means.\1\ In many cases, a dealer
(``selling broker'') that has signed a selling agreement with the
primary
[[Page 25921]]
distributor of a 529 college savings plan makes available to employers
the opportunity to initiate a workplace marketing program for those
employees who choose to enroll and make contributions under the 529
college savings plan.\2\ The selling broker typically meets with the
employer's human resources/benefits representatives, who then may agree
to have the employer participate in the workplace marketing program.
One form of workplace marketing program provides for the employer to
utilize its existing payroll direct deposit process for after-tax
contributions by employees. In other cases, employee contributions may
be effected by means of ACH (automated clearing house) bank transfers
or other means, whether electronically or by check.
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\1\ The description of certain characteristics of workplace
marketing programs in this notice is intended to illustrate the
application of MSRB rules and is not intended to imply that
workplace marketing programs having different characteristics are
not permitted under MSRB rules.
\2\ In some cases, the primary distributor itself, rather than a
separate dealer, may initiate a workplace marketing program and
undertake the various functions of a selling broker described in
this notice. In other cases, the selling broker may have a
contractual relationship with the issuer rather than with, or in
addition to, the primary distributor.
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After the employer has agreed to participate in a workplace
marketing program, its employees can establish an account in a variety
of manners, depending upon the specific 529 college savings plan. For
example, many workplace marketing programs provide for the employee to
establish an account with the primary distributor by completing an
online or paper account application and participation agreement, which
is submitted directly to the primary distributor. In other cases,
applications may be submitted to a transfer agent \3\ or the issuer, or
may be handled by the selling broker itself. Typically, the selling
broker provides the employer with materials for distribution to
interested employees describing the particular 529 college savings
plan, including but not limited to the program disclosure document that
meets the definition of ``official statement'' under Exchange Act rule
15c2-12. Further, the selling broker may, but does not always, hold
informational meetings with employees, either in groups or
individually. However, in many workplace marketing programs, once the
employer has agreed to participate, employees can enroll in the program
and make contributions directly through the primary distributor,
transfer agent or issuer without any further involvement of the selling
broker.
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\3\ Third-party transfer agents are generally considered, under
section 3(a)(25) of the Exchange Act, to be providing services on
behalf of the issuer of securities. The MSRB understands that, in
the 529 college savings plan market, transfer agents may sometimes
be engaged by the primary distributor to handle certain
recordkeeping and processing functions on behalf of the primary
distributor.
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When an employee enrolls in the workplace marketing program,
certain information regarding the employee's enrollment is made
available to the parties who are involved in the processing of the
enrollment and contributions. Typically, however, the selling broker
will receive notification of an account opening and any transactions
effected for an individual employee only after the fact, either on a
transaction-by-transaction basis or in periodic summaries of trade
activities.\4\ Thus, unless the selling broker itself handles the
enrollment and contribution functions for employees, the selling broker
may not learn the identity of individual employees actually making
investments in the 529 college savings plan until well after the time
of trade and settlement on such transactions. The selling broker
generally receives commissions on an individual participant basis for
those employees who enroll and invest in the 529 college savings plan.
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\4\ Where the primary distributor itself serves in the role of
selling broker, it will obtain information concerning the
transaction on a timely basis where enrollment and contributions are
effected directly with the primary distributor and, where enrollment
and contributions are effected with a transfer agent that has a
direct contractual relationship with the primary distributor, the
transfer agent will obtain such information on a timely basis on
behalf of the primary distributor.
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The MSRB has established a number of rules designed to protect
customers purchasing municipal securities (including investments in 529
college savings plans) from or through dealers. In particular, under
rule G-19, a dealer that recommends a 529 college savings plan
transaction to a customer must have reasonable grounds for believing
that the recommendation is suitable, based upon information available
from the issuer or otherwise and the facts disclosed by or otherwise
known about the customer. To assure that a dealer effecting a
recommended transaction with a non-institutional customer has the
information needed about the customer to make its suitability
determination, the rule requires the dealer to make reasonable efforts
to obtain information concerning the customer's financial status, tax
status and investment objectives, as well as any other information
reasonable and necessary in making the recommendation. In addition, the
dealer has certain disclosure-related obligations to the customer,
regardless of whether the dealer has recommended a particular
transaction to the customer. For example, under rule G-32, the dealer
is obligated to deliver an official statement to the customer by
settlement of the transaction.\5\
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\5\ In the case of a repeat purchaser who has already received
the official statement, dealers generally are required to deliver
any amendments or supplements to the official statement in
connection with subsequent investments in the 529 college savings
plan.
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Further, under rule G-17, each dealer, in the conduct of its
municipal securities activities, must deal fairly with all persons and
must not engage in any deceptive, dishonest or unfair practice. This
rule has been interpreted to require a dealer to disclose to its
customer, at or before the time of trade, all material facts concerning
the transaction known by the dealer, as well as material facts about
the security when such facts are reasonably accessible to the
market.\6\ This rule G-17 disclosure obligation applies regardless of
whether the dealer has made a recommendation to the customer. If the
customer is investing in an out-of-state 529 college savings plan, the
dealer also is obligated to inform the customer that, depending upon
the laws of the customer's home state, favorable state tax treatment
for investing in a 529 college savings plan may be limited to
investments made in a plan offered by the customer's home state.\7\
Further, rule G-17 prohibits the dealer from misleading customers
regarding facts material to the transaction, including but not limited
to the availability of state tax benefits in connection with an
investment in a 529 college savings plan.\8\
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\6\ See rule G-17 Interpretation--Interpretive Notice Regarding
Rule G-17, on Disclosure of Material Facts, March 20, 2002, MSRB
Rule Book.
\7\ See rule G-21 Interpretation--Application of Fair Practice
and Advertising Rules to Municipal Fund Securities, May 14, 2002,
MSRB Rule Book.
\8\ Id.
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A dealer is obligated under rule G-17 to deal fairly not only with
customers but with all persons in connection with the conduct of its
municipal securities activities. Thus, in addition to dealing fairly
with employees that have agreed to participate in a workplace marketing
program, a selling broker that enters into a formal or informal
agreement with an employer to undertake a workplace marketing program
also is obligated under rule G-17 to deal fairly with the employer
itself.\9\ Whether a dealer has
[[Page 25922]]
dealt fairly with an employer is dependent upon the facts and
circumstances. However, the MSRB believes that, under these
circumstances, rule G-17 obligates the selling broker to disclose to
the employer all material facts known by the selling broker concerning
the transactions it is attempting to induce, as well as material facts
about the security when such facts are reasonably accessible to the
market. If the selling broker knows or has reason to know that one or
more employees may not be resident in the state of the 529 college
savings plan being offered under the workplace marketing program, rule
G-17 requires the selling broker to disclose to the employer that,
depending upon the laws of the state of residence of an employee,
favorable state tax treatment for investing in a 529 college savings
plan may be limited to investments made in a 529 college savings plan
offered by the employee's home state. These are the same disclosures
that a dealer effecting a transaction with individual customers is
required to make under rule G-17.
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\9\ Under section 15B(c)(1) of the Exchange Act, any dealer that
attempts to induce the purchase of municipal securities must do so
in compliance with MSRB rules. This would include an attempt by a
selling broker (or a primary distributor acting in the role of a
selling broker) to induce employees to invest in a 529 college
savings plan through an employer participating in a workplace
marketing program. Thus, the selling broker generally will become
obligated to comply with the duties established under rule G-17 with
respect to the employer in connection with the procurement of the
employer's agreement to participate in the workplace marketing
program, even if there is no assurance that any employee ultimately
will enroll. This obligation would not apply to an issuer if its own
personnel or agents of the issuer were to initiate a workplace
marketing program with an employer, as MSRB rules do not apply to
issuers.
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Where a selling broker has recommended a transaction in a 529
college savings plan to an employee through a workplace marketing
program, the selling broker is fully obligated to make a suitability
determination under rule G-19.\10\ The selling broker would be
responsible for obtaining and maintaining the information required
under rule G-19(b) in connection with such suitability determination
and the additional information required under rule G-8(a)(xi), as well
as for maintaining proper supervision.\11\ The MSRB has previously
stated that whether a particular transaction is in fact recommended
depends on an analysis of all the relevant facts and circumstances.\12\
Among the facts and circumstances that generally would be relevant in
this context is the nature of the statements made by the selling broker
if it conducts any informational meetings with employees. If, for
example, the selling broker conducts an employee informational meeting
at which it states that the particular 529 college savings plan is
appropriate for most or all employees, or at which it advises
individual employees that the plan or specific investment options
within the plan are appropriate for such individuals, the introducing
broker most likely has made a recommendation. If, however, the selling
broker provides, at most, only generalized recommendations about the
529 college savings plan accompanied by clear statements that
enrollment in this particular 529 college savings plan or investment in
any particular investment option within the plan may not be appropriate
for all employees, the selling broker must have reasonable grounds for
the generalized recommendation in light of the information about the
security but need not make a determination that the investment is
suitable for each employee in attendance.\13\ A selling broker making a
recommendation to a particular employee also is fully responsible for
providing the required disclosure information under rules G-17 and G-
32.
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\10\ A selling broker that recommends a transaction to an
employee cannot avoid its suitability obligations and related duties
simply because the employee places its order directly with the
primary distributor, transfer agent or issuer. In addition, a
primary distributor acting in the role of a selling broker that
recommends a transaction to an employee cannot avoid its suitability
obligations and related duties simply because the employee places
its order directly with the issuer or transfer agent.
\11\ Rule G-27 requires an appropriate principal to review the
opening of each customer account and of each transaction for such
customer. In addition, rules G-8 and G-9 require dealers to create
and preserve certain records in connection with such accounts and
transactions.
\12\ See rule G-19 Interpretive Letter--Recommendations,
February 17, 1998, MSRB Rule Book. The MSRB also has provided
guidance on recommendations in the context of on-line communications
in rule G-19 Interpretation--Notice Regarding Application of Rule G-
19, on Suitability of Recommendations and Transactions, to Online
Communications, September 25, 2002, MSRB Rule Book.
\13\ See rule G-19 Interpretation--Notice Concerning the
Application of Suitability Requirements to Investment Seminars and
Customer Inquiries Made in Response to a Dealer's Advertisements,
May 7, 1985, MSRB Rule Book.
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If a selling broker does not make a recommendation in connection
with a transaction in a 529 college savings plan by an employee through
a workplace marketing program, it has no suitability obligation under
rule G-19. Although the selling broker still would be obligated to
provide the required disclosures under rules G-17 and G-32, if all
employee transactions under the workplace marketing program are handled
by the primary distributor or a transfer agent that has contractually
agreed to act on behalf of the primary distributor, the selling
broker's responsibilities will be conclusively fulfilled if the placing
of an order in that manner is conditioned upon actual receipt of the
official statement and the primary distributor has formally agreed to
be responsible for such delivery.\14\ For example, if employees make
investments directly through the primary distributor's Web site and the
Web site requires that investors first view or download the official
statement before being allowed to complete transactions, then the
selling broker would be able to conclusively rely on this method of
delivery for purposes of fulfilling its disclosure requirements.\15\
However, if the primary distributor does not provide assurances that
necessary disclosures will be made to employees, the selling broker
will be required to provide such disclosures.\16\ The selling broker
must put in place appropriate supervisory procedures to ensure that
required disclosures are provided in a satisfactory manner where it is
not entitled to conclusively rely on the primary distributor as
described above.
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\14\ Under these circumstances, the primary distributor could be
held responsible for any failures to meet the disclosure
requirements of rules G-17 and G-32. In addition, the primary
distributor should note that, if the official statement omits
material information that it would be obligated to provide under
rule G-17, the primary distributor would be responsible for
providing such omitted information.
\15\ The MSRB has provided guidance on electronic delivery of
required disclosure information in rule G-32 Interpretation--Notice
Regarding Electronic Delivery and Receipt of Information by Brokers,
Dealers and Municipal Securities Dealers, November 20, 1998, MSRB
Rule Book. Arrangements assuring actual delivery of the official
statement to employees may also be possible in circumstances where
paper applications and participation agreements are mailed directly
to the primary distributor or its transfer agent.
\16\ Selling brokers would be advised, for example, to provide
official statements to the employer's human resource/employee
benefits department and at any employee informational meetings that
it attends. The selling broker may enter into contractual
arrangements whereby the primary distributor, transfer agent, issuer
or other party agrees to provide the required disclosures to
employees. However, except as described above, the selling broker
will be responsible for any failure by such third party to meet its
contractual delivery obligation.
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In addition, where a selling broker is entitled to conclusively
rely on disclosures provided by the primary distributor or transfer
agent (as described in the preceding paragraph) and the transaction is
not recommended, the selling broker may conclusively rely on the
primary distributor to fulfill the selling broker's supervisory
obligation to review and approve customer accounts and transactions
under rule G-27(c)(iii) and (vii) for such accounts and transactions if
the primary distributor has formally agreed to be responsible for such
[[Page 25923]]
supervision.\17\ Under circumstances where such conclusive reliance is
not available to the selling broker, the selling broker may fulfill
these supervisory obligations by reviewing and approving individual
account openings and transactions as information becomes available from
the primary distributor, transfer agent or other relevant party. In all
cases of non-recommended transactions, the selling broker must
undertake prompt reviews and approvals of agreements obtained from
employers to participate in a workplace marketing program and for
recording account information under rule G-8(a)(ii) and customer
specific information for each enrolled employee required under rule G-
8(a)(xi) (of which only information under items (A), (C), (E) and (H)
thereunder shall be required) as it becomes available. A selling broker
wishing to rely on the guidance provided in this notice also is
required to record the name and principal business address of any
employer agreeing to participate in a workplace marketing program,
together with the signature of an appropriate principal approving such
agreement. Selling brokers are reminded that the conclusive reliance
permitted by this paragraph and the preceding paragraph is not
available in the case of recommended transactions, in which case the
selling broker retains the primary obligation to fulfill all customer
protection, disclosure, supervisory and recordkeeping duties.
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\17\ Under these circumstances, the primary distributor could be
held responsible for any failures to meet such supervisory
obligations.
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Dealers should note that none of the foregoing obviates the need
for primary distributors to fulfill all of their customer protection
obligations under MSRB rules where a selling broker is not otherwise
required to fulfill such obligations. Furthermore, if transactions
subsequent to the initial enrollment of an employee in a workplace
marketing program are effected directly between the employee and the
primary distributor, the primary distributor generally will have sole
responsibility with respect to compliance with MSRB rules in connection
with such subsequent transactions, provided that the selling broker
will be required to record information regarding subsequent
transactions as required under rule G-8(a)(ii) to the extent that it
receives transaction-based compensation for such transactions. Dealers
also should note that, if employees make their purchases directly from
the governmental issuer (whether through the issuer's own employees or
any non-dealer agent of the issuer), the selling broker or primary
distributor that enlists an employer to participate in a workplace
marketing program is ultimately responsible for fulfilling all of its
obligations under MSRB rules. Thus, for example, although an issuer may
undertake to provide disclosure materials to investors, the dealer
remains responsible under MSRB rules should the issuer fail to deliver
the required disclosures to an employee who enrolls in a 529 college
savings plan through a workplace marketing program promoted by the
dealer acting as a selling broker, or if such disclosure information is
not delivered in a timely manner.
[FR Doc. 03-11998 Filed 5-13-03; 8:45 am]
BILLING CODE 8010-01-P