[Federal Register: June 15, 2006 (Volume 71, Number 115)]
[Notices]
[Page 34654-34655]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jn06-68]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53959, File No. SR-MSRB-2006-03]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Approving Proposed Rule Change Consisting of Interpretive
Guidance on Customer Protection Obligations of Brokers, Dealers and
Municipal Securities Dealers Relating to the Marketing of 529 College
Savings Plans
June 8, 2006.
On March 31, 2006, the Municipal Securities Rulemaking Board
(``MSRB'' or ``Board''), filed with the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change consisting of interpretive
guidance on customer protection obligations of brokers, dealers and
municipal securities dealers (``dealers'') relating to the marketing of
529 college savings plans. The proposed rule change was published for
comment in the Federal Register on May 2, 2006.\3\ The Commission
received six comment letters regarding the proposal.\4\ On June 1,
2006, the MSRB filed a response to the comment letters.\5\ This order
approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 53715 (April 25,
2006), 71 FR 25867 (May 2, 2006) (the ``Commission's Notice'').
\4\ See letter from David J. Pearlman, Chairman, College Savings
Foundation (``CSF''), dated April 24, 2006; letter from Frank
Traynor, dated April 28, 2006; letter from Patricia D. Struck,
President, North American Securities Administrators Association,
Inc. (``NASAA''), dated May 22, 2006; letter from Tamara K. Salmon,
Senior Associate Counsel, Investment Company Institute (``ICI''),
dated May 22, 2006; letter from Dale E. Brown, Executive Director &
CEO, Financial Services Institute (``FSI''), dated May 23, 2006; and
letter from Elizabeth Varley, Vice President and Director of
Retirement Policy, and Michael D. Udoff, Vice President, Associate
General Counsel and Secretary, Securities Industry Association
(``SIA''), dated May 31, 2006.
\5\ See letter from Ernesto A. Lanza, Senior Associate General
Counsel, MSRB, to Martha M. Haines, Chief, Office of Municipal
Securities, Commission, dated June 1, 2006 (``MSRB's Response
Letter''). The MSRB's Response Letter does not address SIA's comment
letter because the Commission received SIA's comment letter after
the comment period for the filing had closed.
---------------------------------------------------------------------------
The proposed rule change consists of interpretive guidance on
customer protection obligations of dealers relating to the marketing of
529 college savings plans. The MSRB proposed an effective date for the
proposed rule change of 60 calendar days after Commission approval. A
full description of the proposal is contained in the Commission's
Notice.
CSF, ICI, FSI and SIA supported the proposed rule change. Mr.
Traynor's comment letter requested clarity concerning the meaning of
the proposed rule change, stating that the proposal was 34 pages long.
The MSRB noted in its response that the Commission's Notice in the
Federal Register \6\ contains a two-page brief summary of the proposed
rule change in Section II.A.1, and that the remainder of the notice
consists of information required to be included in the notice under the
MSRB's regulatory obligations established by the Commission, including
an extensive discussion of the comments received on earlier draft
versions of the proposed rule change that, among other things, explains
the rationale for the MSRB's rulemaking determinations. In addition,
the MSRB stated that it provides comprehensive information on the
regulatory duties of dealers in connection with the marketing of 529
college savings plans and other information useful to investors on its
Web site at http://www.msrb.org/msrb1/mfs, and that any member of the
public seeking an explanation of the proposal or any existing MSRB rule
should not hesitate to contact MSRB staff at (703) 797-6600.
---------------------------------------------------------------------------
\6\ See supra note 3.
---------------------------------------------------------------------------
NASAA's comment letter expressed support for the efforts made by
the MSRB to strengthen the marketing rules and disclosure requirements
in connection with the offer and sale of 529 plans. Nonetheless, NASAA
said they were concerned that certain key disclosure obligations set
forth in earlier drafts of the MSRB's guidance \7\ were omitted from
the proposed rule change. NASAA more specifically stated that they
believe removing the comparative suitability analysis requirement and
alleviating a broker-dealer's obligation to provide specific
information regarding home state 529 plan benefits will have a
detrimental effect on customers.
---------------------------------------------------------------------------
\7\ See MSRB Notice 2005-28 (May 19, 2005) (the ``2005
Notice'').
---------------------------------------------------------------------------
The MSRB's Response Letter states that the MSRB noted in its filing
the potential adverse impact of the comparative suitability and
specific home state disclosure proposals as an important factor in its
approval of the disclosure and suitability language included in the
proposed rule change. The MSRB stated that the comparative suitability
and home state disclosure proposals from the 2005 Notice would have
imposed unprecedented new obligations on dealers to become sufficiently
knowledgeable about many or potentially all investment options
available in the 529 college savings plan market (including a large
number of 529 college savings plans that the dealer does not offer) in
order to provide accurate disclosures and to arrive at appropriate
conclusions in connection with a comparative suitability analysis. The
MSRB stated that some state plans expressed objections over a provision
that would require dealers that do not market their plans to make
disclosures about such plans. The MSRB also noted a number of press
reports detailing the negative impact of the comparative suitability
proposal and anecdotal
[[Page 34655]]
evidence that some dealers had been withdrawing from, or considering
limiting their offerings in, the 529 college savings market at least in
part due to the proposal in the 2005 Notice. Further, the MSRB stated
that, as noted in the filing, there is a potential for over-emphasizing
the importance of a particular state's beneficial state tax treatment
of an investment in its 529 college savings plan.
NASAA's comment letter also stated that while they are encouraged
by the point-of-sale disclosures outlined in the Commission's Notice,
they believe that these disclosures would better serve the interests of
investors if they were provided in a more effective and timely manner.
NASAA questioned the effectiveness of providing the out-of-state plan
disclosures at the time of the transaction. NASAA stated that they
believe the out-of-state disclosures should be made well before the
trade to achieve maximum effectiveness, and that the mechanism for this
disclosure should be more specific and concrete.
The proposal provides that the out-of-state disclosure obligation
may be met if the disclosure appears in the program disclosure
document, so long as the program disclosure document has been delivered
to the customer at or prior to the time of trade and the disclosure
appears in the program disclosure document in a manner that is
reasonably likely to be noted by an investor. NASAA stated that it is
left open to question whether or not customers will, in fact, take note
of these disclosures. NASAA recommended that broker-dealers be required
to make a disclosure separate from the plan document before their
disclosure obligations are deemed fulfilled.
The MSRB's Response Letter stated that with respect to the manner
and timing of the proposed time-of-trade disclosures to customers, the
MSRB believes that it has achieved an appropriate balance that ensures
that the required disclosures are made in a timely and balanced manner
without potentially over-emphasizing the home state tax element as
compared to the other numerous items of important information provided
to customers. The MSRB stated that it continues to monitor the
Commission's proposed point-of-sale disclosure obligations in
connection with mutual fund, variable annuity and 529 college savings
plan sales under proposed Exchange Act Rule 15c2-3, which under certain
circumstances could provide for the making of disclosures at a time
prior to the time-of-trade. The MSRB stated that it has taken NASAA's
suggestions in this regard under advisement pending final action by the
SEC on proposed Rule 15c2-3.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the MSRB \8\ and, in particular, the
requirements of Section 15B(b)(2)(C) of the Act and the rules and
regulations thereunder.\9\ Section 15B(b)(2)(C) of the Act requires,
among other things, that the MSRB's rules 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.\10\ In particular, the
Commission finds that the proposed rule change is consistent with the
Act because it will further investor protection by strengthening and
clarifying dealers' customer protection obligations relating to the
marketing of 529 college savings plans, including but not limited to
the duty to provide important disclosures to customers investing in
out-of-state 529 college savings plans relating to state tax treatment
and other benefits and to undertake active suitability analyses for
recommended transactions based on appropriately weighted factors.
---------------------------------------------------------------------------
\8\ In approving this rule the Commission notes that it has
considered the proposed rule's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\9\ 15 U.S.C. 78o-4(b)(2)(C).
\10\ Id.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-MSRB-2006-03) be, and hereby
is, approved.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-9352 Filed 6-14-06; 8:45 am]
BILLING CODE 8010-01-P