Compliance Corner: Summer 2020
Compliance in Focus: Supporting 529 Plans and ABLE Programs
By Joe Darcy, MSRB Board Member and Chair of the Municipal Fund Securities Advisory Group
As part of our commitment to supporting 529 plans and Achieving a Better Life Experience Act of 2014 (ABLE) programs, the MSRB Board of Directors established our first external Municipal Fund Securities Advisory Group (MFSAG) in fiscal 2019. This group has expanded the MSRB’s access to a diverse group of municipal market professionals that has helped us better understand the rule impacts, practices, transparency and investor education related to these programs.
Now in its second year, the MFSAG continues to demonstrate its value through extensive consultation regarding resources for practitioners and investors. Meet the 11 members of the FY 2020 MFSAG.
Most recently, the MSRB worked with the MFSAG to roll out a new resource on investment performance considerations for 529 plan account owners . Investing in a 529 savings plan , a tax-advantaged qualified tuition program designed to help investors save for certain education expenses, involves considerations about investment options, tax implications of withdrawals, and realized vs. unrealized gains and losses. Market conditions could affect plan owners’ account value and investment option changes could result in the realization of paper gains or losses. If funds are withdrawn for unqualified expenses, those realized gains could have tax consequences.
We look forward to our continued work with the MFSAG and all those who volunteer to serve on MSRB advisory groups. Their time and expertise make a positive impact.
Additional MSRB 529 Plan Resources
- Investor’s Guide to 529 Savings Plans : The MFSAG is working on a 2020 update to this guide, which helps potential 529 plan account owners and contributors understand how the plans work to help support informed investment decisions.
- Compiled MSRB Guidance on 529 Savings Plans and ABLE Programs : The MSRB’s compliance center hosts a compilation of the major interpretative guidance that the MSRB has provided regarding the offer and sale of interests in 529 savings plans and ABLE programs, which are subject to all MSRB rules unless specifically exempted.
- U.S. Securities and Exchange Commission’s Introduction to 529 Plans : This webpage provides investors with background information on 529 plans.
Joseph Darcy is a member of the Board of Directors of the Municipal Securities Rulemaking Board (MSRB) and serves on the Finance Committee, the Nominating and Governance Committee and the Governance Review Special Committee. He is retired a former executive vice president and sector head for municipal fixed income at the Hartford Fire Insurance Company, where he oversaw and managed a $15 billion taxable and tax-exempt municipal bond portfolio. In 2016, he served on the MSRB’s Investor Advisory Committee.
Questions about Municipal Advisor Compliance Matters?
The MSRB, U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) are hosting a free, virtual compliance outreach program for municipal advisors. The webcast program will be held Thursday, August 13, 2020, from 1 p.m. to 3 p.m. ET.
The program will provide municipal market participants an opportunity to hear from SEC, MSRB and FINRA staff on timely regulatory and compliance matters for municipal advisors. Have a question? Participants are encouraged to submit questions in advance of the event by emailing MSRBEvents@msrb.org.
Additional information, including the agenda, is available on SEC.gov and MSRB.org.
Read the press release. Register here.
Compliance Frequently Asked Questions ( FAQs)
This periodic feature provides answers to commonly asked questions about compliance with MSRB rules. The answers to these questions do not create new legal or regulatory requirements or new interpretations of existing requirements and should not be interpreted by regulated entities or examining authorities as establishing new standards of conduct. This resource should be read in conjunction with MSRB rules and interpretations. The complete text of all MSRB rules and interpretations is available here .
Q: If a dealer is acting as a private placement agent in connection with a conduit borrowing, must the dealer disclose the activity as "municipal securities business" as part of the dealer's Form G-37 quarterly filing?
A: Yes. The term "municipal securities business" includes the offer or sale of a primary offering of municipal securities on behalf of any municipal entity (e.g., private placement). Although the ultimate obligor in such a conduit financing may be the conduit borrower, to the extent the dealer acts as private placement agent on behalf of a municipal entity, it is engaging in municipal securities business for purposes of Rule G-37 .
Q: If a dealer has adopted a default proxy to determine whether a trade is "contemporaneous" in connection with determining the prevailing market price (PMP) for purpose of its fair pricing obligation under Rule G-30 , what are the supervisory obligations in establishing and reviewing the continued appropriateness of such default proxy?
A: As a threshold matter, the MSRB guidance does not prescribe a bright-line standard for what time period may be used as a reasonable proxy; and a firm's determination may be informed by case law (i.e., relevant cases have often viewed transactions as contemporaneous when they occur on the same trading day, and in some instances, transactions that occurred up to five days later were viewed as contemporaneous), industry standards and a dealer's own experience, among other factors. MSRB previously discussed establishing a default proxy in its Confirmation Disclosure and Prevailing Market Price Guidance: Frequently Asked Questions 3.9 noting that:
Dealers may establish an objective set of criteria to determine whether a trade is contemporaneous, provided the objective criteria are established based on the exercise of reasonable diligence. For example, dealers could define an objective period of time as a default proxy for determining whether the trade is contemporaneous. Dealers could also define criteria to consider other relevant factors, such as whether intervening trades by other firms occurred at prices sufficiently different than the dealer’s trade to suggest that the dealer’s trade no longer reasonably reflects the current market price for the security, or whether changes in interest rates or the credit quality of the security, or news reports were significant enough to reasonably change the PMP of the security. Given the different trading characteristics of different municipal securities, and relevant court and SEC case law applicable to debt securities in general, it likely would not be reasonable for a dealer’s policies and procedures to determine categorically that all transactions that occur outside of a specified time frame are not “contemporaneous.” Accordingly, dealers should include in their policies and procedures an opportunity to review and override the automatic application of default proxies (e.g., by reconsidering the application for transactions identified through reasonable exception reporting and specifying designated time intervals (or market events) after which such proxies will be reviewed).
In light of the principles outlined in FAQ 3.9 and to help demonstrate compliance with its obligation to determine prevailing market prices under Rule G-30 and facilitate compliance with its supervisory obligations under Rule G-27(a) , it would be prudent for a dealer to, for example, document why a default proxy it has established is reasonable and to have procedures that provide a mechanism(s) for the review and, if necessary, override of the firm’s automatically applied default proxies to ensure that the firm’s definition of “contemporaneous” is and continues to be reasonable.
Compliance Tip: Review Your Trades
Under MSRB Rule G-14 , on reports of sales or purchases, dealers must submit transaction data that conforms to the formats specified for the RTRS Portal used for trade submissions and dealers have an obligation to report this information promptly, accurately and completely.
A dealer is obligated to promptly review and address any problem or potential problem with submitted trade data that is reported to the dealer through the Message Portal, through the RTRS Web Portal or via electronic mail.
Dealers and municipal advisors should note the following key compliance dates and deadlines relevant through the fourth quarter of calendar year 2020.
July 31, 2020: Final Day of Temporary Suspension of Late Fees under MSRB Rules A-11 and A-12(d) (MA/BD) In an effort to afford regulated entities an opportunity to better manage and allocate resources during these unprecedented times, the MSRB (i) suspended late fees owed for the period of March 1, 2020 through July 31, 2020. Read Notice 2020-09.
July 31, 2020: Quarterly Form G-37 Disclosure Submission Period Closes (MA/BD) MSRB-regulated entities must submit information to the MSRB through Form G-37 on their municipal securities and advisory business and related political contributions to municipal entity officials, state and local political parties, and bond ballot campaigns. Read instructions for Form G-37.
This periodic feature summarizes a recent enforcement matter brought by an examining authority, which includes the SEC, FINRA or applicable bank regulator, relevant to the municipal securities market. Enforcement matters can, when applicable, inform firms and help identify potential compliance risks. Read about the MSRB’s regulatory coordination and enforcement support .
On June 25, 2020, FINRA agreed to a Letter of Acceptance, Waiver, and Consent (AWC) with BNY Mellon (“the firm”) for conduct that violated MSRB Rule G-34 , on CUSIP Numbers, New Issue, and Market Information Requirements. Rule G-34 requires each remarketing agent for a VRDO submit certain information, including minimum denominations and maximum interest rates, to the MSRB SHORT system on timely basis.
From April 1, 2011 through March 15, 2018, BNY did not submit accurate minimum denomination and maximum interest rates to the MSRB's Short-Term Obligation Rate Transparency (SHORT) system in over 50,000 instances as is required by Rule G-34. In addition, during that same time period, the firm, as a remarketing agent for Variable Rate Demand Obligations (VRDOs), failed to submit the minimum denomination in 1,449 submissions (2.7% error rate) and the maximum interest rate in 52,821 submissions (99% error rate) to the MSRB's SHORT system. The firm's internal reporting system did not require the entry of the minimum denomination and maximum interest rate fields, despite such fields being required pursuant to Rule G-34, and thus traders did not populate these data fields. The firm agreed to a censure and a fine of $35,000 for the MSRB Rule G-34 violations.
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Keep up with current requests for comment, updated regulatory requirements and upcoming rule filings, and learn about opportunities to provide input at various stages of the MSRB’s rulemaking process .
July 1, 2020: Federal Register Notice of Approval: Proposed Rule Change to Align Certain MSRB Rules to Securities Exchange Act Rule 15l-1, Regulation Best Interest
June 26, 2020: MSRB Notice: MSRB Harmonizes Rules with Requirements of Regulation Best Interest
June 25, 2020: SEC Approval Order: Proposed Rule Change to Align Certain MSRB Rules to Securities Exchange Act Rule 15l-1, Regulation Best Interest
June 24, 2020: Federal Register Notice of Filing: Proposed Rule Change Consisting of Amendments to MSRB Rules A-3 and A-6 that are Designed to Improve Board Governance
June 24, 2020: MSRB Notice: MSRB Enhances Transparency of Timing of Issuers' Annual Disclosures on the EMMA Website
June 5, 2020: Proposed Rule Change Consisting of Amendments to MSRB Rules A-3 and A-6 that are Designed to Improve Board Governance
June 5, 2020: Federal Register Notice of Immediately Effective Rule Change: Proposed Rule Change to Waive MSRB Market Activity Fees Related to Transactions with the Municipal Liquidity Facility Established by the Board of Governors of the Federal Reserve System
June 1, 2020: SEC Approval Order: Proposed Rule Change to Waive MSRB Market Activity Fees Related to Transactions with the Municipal Liquidity Facility Established by the Board of Governors of the Federal Reserve System
May 28, 2020: MSRB Notice: MSRB Waives Market Activity Fees for Transactions with the Municipal Market Liquidity Facility
May 28, 2020: Proposed Rule Change to Waive MSRB Market Activity Fees Related to Transactions with the Municipal Liquidity Facility Established by the Board of Governors of the Federal Reserve System
May 26, 2020: MSRB Notice: MSRB Provides Resources for Municipal Bond Investors about Potential Effects of COVID-19
May 12, 2020: Federal Register Notice of Filing: Proposed Rule Change to Align Certain MSRB Rules to Securities Exchange Act Rule 15l-1, Regulation Best Interest
May 1, 2020: Proposed Rule Change to Align Certain MSRB Rules to Securities Exchange Act Rule 15l-1, Regulation Best Interest
April 24, 2020: Federal Register Notice of Immediately Effective Rule Change: Proposed Rule Change to Provide Dealers and Municipal Advisors Additional Time to Comply with Certain Obligations for a Temporary Period of Time and Temporarily Suspend Late Fees on Payments Owed to the MSRB