Notice of Filing of Amendments to Rule G-21 Relating to Month-End Performance Data for Municipal Fund Securities

On June 2, 2005, the Municipal Securities Rulemaking Board (the “MSRB”) filed with the Securities and Exchange Commission (the “SEC”) a proposed rule change amending Rule G-21, on advertising, to establish requirements relating to the availability of performance data current to the most recent month-end in connection with advertisements by brokers, dealers and municipal securities dealers (“dealers”) containing performance data for municipal fund securities.[1]  The MSRB has requested that the SEC require dealers to comply with the proposed rule change for advertisements of municipal fund securities submitted or caused to be submitted for publication on or after December 1, 2005.

DESCRIPTION OF PROPOSED RULE CHANGE

The MSRB has recently amended Rule G-21 to, among other things, establish requirements relating to the inclusion of performance data in advertisements used or produced by dealers relating to municipal fund securities (the “recent amendments”).[2]  These requirements are, in most respects, consistent with the requirements applicable under Rule 482 adopted by the SEC under the Securities Act of 1933, as amended (the “Securities Act”), for mutual fund advertisements that contain performance data.  However, one provision of Securities Act Rule 482 that was not included in the recent amendments requires that mutual fund advertisements showing performance data that is not current as of the most recent month-end also include a phone number or website address at which performance data may be obtained that is current to the most recent month-end, available no later than seven business days after the end of the month.

The proposed rule change would further amend Rule G-21 to require dealers to include in advertisements that contain performance data for municipal fund securities a phone number or web address where investors may obtain performance data current to the most recent month-end, unless the data included in the advertisement is itself current to the most recent month-end.  Specifically, the proposed rule change would amend clause (C) of Rule G-21(e)(ii) to provide that performance data in advertisements must be calculated as of the most recent practicable date considering the type of municipal fund securities and the media used, except that any advertisement containing total return quotations would be in compliance with this requirement if:

(1)(a) total return quotations are current to the most recent calendar quarter ended prior to the submission of the advertisement for publication for which such return, or all information required for the calculation of such return, is available to the dealer, and (b) total return quotations (current to the most recent month ended seven business days prior to the date of any use[3] for which such return, or all information required for the calculation of such return, is available to the dealer) are provided at a toll-free or collect telephone number or website identified in the advertisement and the month to which such information is current is identified; or

(2) 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 return, or all information required for the calculation of such return, is available to the dealer and the month to which such information is current is identified.

In addition, the proposed rule change would amend clause (C)(1) of Rule G-21(e)(i) to require that any municipal fund securities advertisement that displays performance information must 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 return is available.

DISCUSSION OF INDUSTRY COMMENTS

On December 16, 2004, the MSRB published for comment a draft amendment to Rule G-21 with respect to advertisements of municipal fund securities.[4]  The MSRB received four comment letters.  Three commentators fully supported the draft amendments, while one commentator was generally supportive of the draft amendments subject to certain concerns regarding the deadlines imposed under the proposal.  The comments received are discussed below.  After reviewing these comments, the MSRB approved the draft amendment, with certain modifications described below, for filing with the SEC.

Impact on State 529 Plan Community

Comments Received.   One commentator stated that it had conducted an informal poll of its issuer members regarding the impact of the draft amendments on their activities.  This commentator noted that all but one issuer prepare monthly performance data but that less than half currently target having such data available for all of their investment options within seven business days of month-end as provided for in the draft amendments.  It stated that most (but not all) issuers that do not meet the seven business day timeframe indicate that 10 business days would be an appropriate outside posting date.

The commentator also noted that some issuers expressed concern that “implementation of the proposed Rule without modification might unfairly disadvantage programs, or investment options within programs, which are not invested entirely (or at all) in mutual funds of one mutual fund family, thereby negatively affecting depositor choice.”  This commentator observed that “application of the proposed standard to qualified tuition programs … [is] more complex than is the case with mutual funds.  Many issuers’ programs include investment options that are invested in assets other than mutual funds.  Many issuers rely upon contractual arrangements with financial institutions to obtain performance data with respect to some or all of their program’s investment options.”  The commentator further stated:

Many issuers also rely upon contractual arrangements with financial institutions with respect to the marketing of their programs, including in some instances the marketing of investment options managed for investment purposes by other financial institutions, by the issuer or by another public entity.  An inability to include the most recent available total return data in advertisements may disadvantage an issuer’s program as compared with other programs.  In addition, an inability to include an investment option in advertisements because total return data is not then available with respect to such investment option may disadvantage such investment option as compared with other investment options within the same program.

Other concerns that issuers expressed to this commentator included initial and ongoing costs of implementing appropriate procedures to assure compliance and the speed at which such procedures can be put in place.  The commentator argued that the draft amendments “effectively impose the compliance burden of the proposed requirement upon unregulated issuers, as it is issuers who will be financially and, in some instances, operationally responsible for the provision of the referenced total return data through a toll-free (or collect) telephone number or website.”

With respect to specific elements of the draft amendments, this commentator sought clarification that the language would never require that performance data be current as of a date other than the end of a month (i.e., that it would never require mid-month calculations).  In addition, it requested that the month-end data that is required to be made available by telephone or the Internet not be made subject to the posting deadline of seven business days after the end of the month.  In the alternative, if the MSRB retains a posting deadline, the commentator suggested that such deadline be extended to 15 business days.  In addition, it stated that this posting deadline be based on when the performance data (or information needed to calculate performance data) becomes available to the issuer, rather than available to the dealer.

MSRB Response.   The MSRB does not view the rule language to require that performance data be calculated other than on an end-of-month basis unless the advertisement in which such data appears otherwise states or reasonably implies.  Therefore, no change to the rule is required for this purpose.

The MSRB believes that it is important that the rule retain the seven business day from end of month deadline, both to ensure consistency with mutual fund rules and to avoid large-scale mismatches between the timeframes for performance data available to investors for one municipal fund security versus another.  This deadline provides that performance data must be current to the most recent month ended seven business days prior to the date of any use for which such return, or all information required for the calculation of such return, is available to the dealer.  In general, so long as either the actual performance data, or all the information necessary to calculate performance, for the most recently ended calendar month is available to the dealer within seven business days after the end of such month, such performance must be used for compliance with the rule.  However, if neither the performance data nor the information required to calculate performance is available to the dealer within that seven business day period, the dealer may continue to use the performance data from the preceding month until the most recent month’s data is available or can be calculated.  Where the issuer has undertaken to prepare performance data for use by dealers in their advertisements, the performance data will be presumed to be first made available to the dealer for purposes of this requirement when such performance data is made available by the issuer to the dealer, regardless of whether some or all of the information needed to calculate performance has previously become available to the dealer.[5]  The MSRB has added a requirement that dealers disclose the month to which month-end performance data is current to ensure that investors understand the information they are provided and are in a better position to make meaningful comparisons between different investment options.

Finally, where an issuer offers various different investment options, the rule’s currentness standard should be read to apply to each investment option separately.  Thus, so long as dealers display performance data for each investment option in a manner that complies with the preceding paragraph, it is possible that, at any given time, performance data for one investment option of an issuer may be current to a different month-end than with respect to the performance data for another investment option of the same issuer.

Fee and Expense Disclosure

Comments Received.   One commentator recommended that the MSRB require additional disclosures in advertisements that include performance data.  This commentator stated:

We urge the MSRB to consider enhancing fee disclosure in the context of municipal fund securities performance advertising.  Accordingly, we ask the MSRB to consider requiring brokers and dealers, in any advertisement containing municipal fund securities performance data, to clearly and prominently disclose all fees and expenses applicable to an investment in those securities in close proximity to such performance data.

This commentator observed that information about fees and expenses is critical in evaluating investments and making informed investment decisions, and such information is “essential in order to achieve and maintain the proper balance” with performance data.  It noted that NASD has filed with the SEC a proposed amendment to its mutual fund advertising rule that would require mutual fund advertisements that include performance data to disclose, in a prominent text box, sales charges and annual expense ratio.[6]  The commentator stated, however, that it did not support NASD’s formatting requirements with respect to such disclosure.

MSRB Response.   The MSRB agrees that disclosure of fees and expenses would be appropriate and that it is crucial for informed investment decisions that such information be available in conjunction with performance data.  The MSRB believes that any such requirement in connection with municipal fund securities be made consistent with requirements that may become applicable to mutual fund advertisements.  The MSRB is taking this suggestion under advisement pending final action by the SEC on the NASD rulemaking proposal.

Effective Date

Comments Received.   One commentator requested that the draft amendments have an effective date of 180 days after SEC approval.  Another commentator also requested a delayed effectiveness of 180 days if the MSRB maintains specific deadlines for making month-end information available.  A third commentator recommended coordination of the effective date for the draft amendments with the recent amendments, which were then pending with a proposed effective date of three months after approval.  However, in a separate comment letter to the SEC on the recent amendments, this commentator requested that such amendments become effective 210 days after approval.  The commentator noted that the SEC had provided a 210-day transition period when it had adopted extensive changes to its mutual fund advertising rule in 1988.

MSRB Response.  The MSRB agrees that the proposed rule change should have the same effective date as the performance data provisions of the recent amendments since the proposed rule change also relates to performance data and therefore is best implemented in tandem with the related provisions of the recent amendments.  The MSRB observes that, under the recent amendments, the SEC provided that all advertisements for municipal fund securities submitted or caused to be submitted for publication on or after December 1, 2005 must come into compliance with Rule G-21(e)(ii) and certain other provisions relating to performance data.[7]  As a result, dealers also would be required to comply with the amendments to Rule G-21(e)(ii) effected by the proposed rule change for advertisements of municipal fund securities submitted or caused to be submitted for publication on or after December 1, 2005.

June 2, 2005

                                                                       * * * * *

TEXT OF AMENDMENTS TO RULE G-21 [8]

Rule G-21.  Advertising.

(a)-(d) No changes.

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

(i) Required disclosures.  Each advertisement for municipal fund securities:

(A)-(B) No changes.

(C) that includes performance data must include:

(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

(2) No changes.

        (D) No changes.

        (ii) Performance data. Each 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), provided that:

(A)-(B) No changes.

(C) performance data 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 clause (A) of this 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 clause (A) of this paragraph) are provided at the toll-free (or collect) telephone number or website identified pursuant to 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)-(F) No changes.

        (iii)-(vi) No changes.

(f) No changes.