

[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]                         

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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.
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    \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.
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    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.
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    \6\ See supra note 3.
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    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.
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    \7\ See MSRB Notice 2005-28 (May 19, 2005) (the ``2005 
Notice'').
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    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.
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    \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.
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    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.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-9352 Filed 6-14-06; 8:45 am]

BILLING CODE 8010-01-P
