Second Request for Comment on Draft Rule Requiring Underwriters to Submit 529 College Savings Plan Information to the MSRB

INTRODUCTION

The Municipal Securities Rulemaking Board (“MSRB”) is seeking further comment on draft Rule G-45 (the “draft rule”) and related rule changes to collect information about 529 college savings plans (“529 plans”) from brokers, dealers and municipal securities dealers (“dealers”) that act in the capacity of underwriter of such plans.  The MSRB has discussed the concept of 529 plan data collection in two prior notices published in 2011 (the “2011 Notice”)[1] and earlier this year (the “2012 Notice”).[2]  Background regarding the purpose of the data collection and its intended use may be found in these notices.

As outlined in the 2012 Notice, draft Rule G-45 would have required underwriters to submit the following information quarterly to the MSRB: basic plan information, total plan assets, total plan contributions, percentage of plan contributions derived from automatic contributions, total plan distributions, fees and expenses of the plan, types of strategies[3] and total assets in each strategy, types of underlying portfolios[4] and total assets in each portfolio, and performance data for each strategy and underlying portfolio.  Draft Form G-45 listed the specific data fields that would be collected electronically by the MSRB.

The MSRB received seven comment letters in response to the 2012 Notice.[5]  The comments address a variety of topics, including the need for data collection, display of data on the MSRB’s Electronic Municipal Market Access (“EMMA”®) system,[6] confidentiality and ownership of data, use of defined terms in the draft rule, concerns regarding  draft Form G-45 and the Form G-45 Manual, voluntary reporting of information, the deadline for and the frequency of reporting, the effective date of the draft rule, the format for submitting data, the nature of required filers, a request for republication of the rule proposal, the perception of incomplete data in the possession of underwriters, the costs versus benefits of the proposal, and the sharing of information with other regulators.

Based on comments in response to the 2012 Notice, the MSRB has prepared a  revised draft Rule G-45, on reporting of information on municipal fund securities, and a revised draft Form G-45, which would be submitted electronically on a semi-annual basis by dealers acting as underwriters of 529 plans through EMMA.  In addition, underwriters would be required to retain records of such information pursuant to amendments to MSRB Rule G-8, on books and records, and MSRB Rule G-9, on preservation of records.

The primary changes to proposed draft Rule G-45 pertain to the scope of the information to be collected, timing of reporting and the implementation schedule, and definitions in the draft rule.  Specifically, the MSRB now proposes semi-annual reporting for Form G-45, except for performance data, and annual reporting for performance data.  Also, under the new proposal, underwriters would have 60 days, rather than 30 days, from the end of each reporting period to submit Form G-45 to the MSRB.  As for the implementation schedule, in order to give underwriters sufficient time to comply, the MSRB now proposes that the draft rule go into effect one year from the date of approval by the Securities and Exchange Commission (“SEC”).

The MSRB also has revised several definitions to address some of the commenters’ concerns regarding industry practice and terminology.  Where appropriate, the MSRB proposes to conform the reporting format and some of the definitions to the College Savings Plans Network’s Disclosure Principles Statement No. 5 (May 3, 2011) (“Statement No. 5”).  Most notably, the MSRB proposes that the reporting format for fee and expense structures and performance data be consistent with Statement No. 5.  The MSRB also replaces the terms “strategy” and “portfolio” with “investment option” and “underlying investments” to track the terminology in Statement No. 5.

In order to ease the burden on underwriters, the MSRB eliminates the requirement to submit information on underlying investments and the requirement to submit the percentage of plan contributions derived from automatic contributions, based on comments that some plans do not track such information.  Finally, in order to facilitate the submission of information, the MSRB will take steps to pre-populate certain data fields on Form G-45, subsequent to the initial filing by underwriters.

Comments on the rule proposal should be submitted no later than December 21, 2012, and may be submitted in electronic or paper form.  Comments may be submitted electronically by clicking here.  Comments submitted in paper form should be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, VA 22314.  All comments will be available for public inspection on the MSRB’s website.[7]

Questions about this notice should be directed to Lawrence P. Sandor, Deputy General Counsel, Regulatory Support, at 703-797-6600.

PRINCIPAL COMMENTS TO 2012 NOTICE AND MSRB RESPONSES

1. Support for collection of data: Certain commenters understand the regulatory need for the data collection and support the development of a form to collect the data. They are generally supportive of the MSRB’s desire to collect information for regulatory purposes, and understand the MSRB’s effort to collect data from primary distributors. Other commenters are supportive of a transparent 529 plan marketplace but believe there are existing authoritative sources for information, such as the CSPN website.

   MSRB response: Commenters have suggested previously that existing websites provide necessary information regarding 529 plans. As the MSRB has explained, the CSPN website contains voluntarily submitted information that would not meet the regulatory needs of the MSRB. Similarly, the MSRB could not rely on information submitted voluntarily to one of the for-profit websites. A rule-based, mandatory data collection regime will ensure the reliability and timeliness of the data.

    

2. Regulatory use and confidentiality: A number of commenters raise concerns about the perceived proprietary nature of the data and the need for confidentiality by the MSRB. Concerns are also raised about displaying the data on the EMMA website and the potential to confuse or mislead investors.

    

   MSRB response: In performing its regulatory responsibilities, the MSRB regularly receives data from dealers that is not made public by the MSRB, as such data is often essential to monitor and oversee activity in the municipal securities market. The information sought by the proposal is not intended for public distribution at this time, and any future proposal to release the information would be conducted in a separate rulemaking proceeding.

    

3. Implementation period: Commenters suggest an implementation period of at least one year from the date of SEC approval. One commenter requests that the MSRB delay reporting until the passage of an appropriate number of complete reporting periods (such as two for semi-annual reporting or four for quarterly reporting), which could have the effect of providing up to nearly a one and a half year implementation period depending on each particular plan’s reporting cycle.

    

   MSRB response: In response to concerns raised by commenters, the MSRB proposes an effective date that is one year from the date of SEC approval, with the first reports due 60 days after the next semi-annual reporting date following the effective date. This implementation period would provide dealers with sufficient time to develop appropriate policies and procedures, and modify systems and controls to comply with the rule.

    

    

4. Reporting deadline: A number of commenters suggest that underwriters be given 60 days from the end of the reporting period to submit some or all of the required information to the MSRB. One commenter agrees with the 30 day deadline for total assets, total contributions, and total distributions but suggests that dealers be given 60 days to gather and report performance data. Another commenter suggests 60 days are needed to gather, review, format and report the information to the MSRB.

    

   MSRB response: The MSRB believes that 30 days are sufficient to gather, format and report the required information to the MSRB. Nevertheless, it proposes an initial deadline of 60 days after each reporting period, with a long-term goal of reducing the deadline to 30 days from the end of the reporting period.

    

    

5. Reporting frequency: Commenters suggest that quarterly reporting is neither reasonable nor necessary and that semi-annual reporting is more consistent with SEC regulatory reporting for mutual funds. One commenter points out that the SEC requires mutual funds to report only portfolio holdings quarterly. Additionally, these commenters suggest that dealers be able to elect, upon first filing a Form G-45, whether information will be filed on a calendar year or fiscal year basis.

    

   MSRB response: While the MSRB believes that much of the information sought is available quarterly, it proposes a semi-annual reporting cycle, with a long-term goal of moving to a quarterly reporting cycle. As for the selection of calendar year or fiscal year, it is important to receive, review and compare all of the information at the same time and, therefore, the MSRB is not proposing such an election for filers. The reporting cycle would be based on the calendar year.

    

6. Format of reporting of fee and expense and performance data: Commenters agree that filers should be able to submit information regarding fees and expenses in the tabular format provided in Statement No. 5, as proposed in the 2012 Notice, but they also suggest that dealers be able to submit the information in alternative formats, as permitted by Statement No. 5. Commenters suggest that the requirement to report performance data be deleted or that the format for reporting be consistent with Statement No. 5.

    

   MSRB response: The MSRB believes that a standardized format for submitting data is necessary and appropriate. Just as with the MSRB’s Real-time Trade Reporting System ("RTRS") through which municipal securities transaction information must be submitted in a particular format to the MSRB, it is important that 529 plan data be submitted to the MSRB in a single format, in order to be useful for analysis and comparison purposes. The MSRB appreciates that not every underwriter may collect fee and expense information in the tabular format provided by Statement No. 5, and for that reason proposes a one year implementation period. Similarly, the MSRB proposes that performance data be reported annually in the format described in Statement No. 5, and only pertaining to investment options, not underlying investments. These formatting requirements would be established by the Form G-45 Manual.

    

7. Required filers: Commenters seek assurance that only primary distributors would be required to submit information to the MSRB, and only to the extent the information is within their possession, custody and control.

    

   MSRB response: The MSRB seeks information only from underwriters of 529 plans. In most instances, the MSRB expects that the primary distributor of a plan would be an underwriter that would submit information to the MSRB in compliance with the draft rule. There may be other underwriters, as defined in SEC Rule 15c2-12(f)(8), that would be obligated to submit information under the draft rule. Also, to the extent an underwriter has delegated duties to a service provider, the MSRB would expect the underwriter to have access to such information. The MSRB seeks a complete data set from each plan, whether submitted by one or more underwriters. If the information required by the draft rule is submitted by the primary distributor of a 529 plan, the MSRB would deem the submission obligation under the draft rule satisfied on behalf of all underwriters of such 529 plan. The MSRB does not, however, seek information from dealers that simply sell interests in 529 plans to customers.

    

8. Recommendations regarding defined terms in proposed Rule G-45: Commenters make a number of suggestions regarding the defined terms in the draft rule, including the terms asset allocation, asset class, benchmark, contributions, distributions, performance, strategy, portfolio and program manager.

    

   MSRB response: In response to the comments, the MSRB has revised a number of the definitions in the draft rule, as provided below.

    

9. Recommendations regarding Form G-45: Commenters make a number of suggestions and seek clarification regarding various provisions in draft Form G-45, including the provisions regarding the manner of distribution, total assets, total contributions and distributions, fee and expense structure and investment strategy.

    

   MSRB response: The MSRB has clarified various provisions in draft Form G-45 based on comments to the 2012 Notice, as provided below.

   SUMMARY OF DRAFT AMENDMENTS TO MSRB BOOKS AND RECORDS RULES

   Draft Rule G-8(g)(iii) would require underwriters to maintain the information described above and detailed in draft Rule G-45 below.

   Draft Rule G-9(a)(xiv) would require underwriters to preserve the records maintained pursuant to draft Rule G-8(g)(iii) for a period of not less than six years.

   November 23, 2012 

   * * * * *

   TEXT OF DRAFT RULE AND AMENDMENTS[8]

   Rule G-45: Reporting of Information on Municipal Fund Securities

   (a) Form G-45 Reporting Requirements.  Each underwriter of a primary offering of municipal fund securities that are not interests in local government investment pools shall report to the Board MSRB the information relating to such offering required by Form G-45 by no later than 60 days the last day of the month following the end of each semi-annual reporting period ending on June 30 and December 31 calendar quarter and in the manner prescribed in the Form G-45 procedures below and as set forth in the Form G-45 Manual.

   (b) Form G-45 Reporting Procedures.

   (i) All submissions of information required under this rule shall be made by means of Form G-45 submitted in a designated electronic format to the Board MSRB in such manner, and including such items of information, as specified herein, in Form G-45 and in the Form G-45 Manual. 

   (ii) Form G-45 shall be submitted by the underwriter or by any submission agent designated by the underwriter pursuant to the procedures set forth in the Form G-45 Manual.  The failure of a submission agent designated by the underwriter to comply with any requirement of this rule shall be considered a failure by such underwriter to so comply. 

   (c) Form G-45 Manual.  The Form G-45 Manual is comprised of the specifications for reporting of information required under this rule, the user guide for submitting Form G-45, testing procedures, and other information relevant to reporting under this rule.  The Form G-45 Manual is located at www.msrb.org and may be updated from time to time with additional guidance or revisions to existing documents. 

   (d) Definitions. 

   (i) The term “asset class” shall mean domestic equities, international equities, fixed income products, commodities, insurance products, bank products, cash or cash equivalents or other product types a group of securities that have the same risk and return characteristics and, therefore, tend to react similarly in different market conditions. 

   (ii) The term “benchmark” shall mean an established index or a blended index that combines the benchmarks for each of the underlying mutual funds or other investments held by an investment option during the relevant time period weighted according to the allocations of those underlying mutual funds or other investments and adjusted to reflect any changes in the allocations and the benchmarks during the relevant time period unmanaged portfolio comprised of established indexes. 

   (iii) The term “contributions” shall mean all deposits into the plan or investment option but shall not include reallocations , strategy or portfolio, whether by existing account owners or new account owners, but shall not include withdrawal of funds from one strategy or portfolio and deposit of the same funds into another strategy or portfolio, such as where an account owner selects a different investment option or funds are moved from one age-band to another as beneficiaries approach college age.

   (iv) The term “designated electronic format” shall mean the format specified in the Form G-45 Manual.

   (v) The term “distributions” shall mean the withdrawal of funds from a plan or investment option ,strategy or portfolio, but shall not include reallocations withdrawal of funds from one strategy or portfolio and deposit of the same funds into another strategy or portfolio, such as where an account owner selects a different investment option or funds are moved from one age-band to another as beneficiaries approach college age.

   (vi) The term “manner of distribution” shall mean the manner by which municipal fund securities are sold to the public, such as through a broker, dealer or municipal securities dealer that has a selling agreement with a primary distributor (commonly known as “advisor-sold”) or through a website or toll-free telephone number (commonly known as “direct-sold”).

   (vi) The term “investment option” shall mean an option, as described in a plan disclosure document or supplement thereto, available to account owners in a plan to which funds may be allocated.

   (vii) The term “marketing channel” shall mean the manner by which municipal fund securities that are not local government investment pools are sold to the public, such as through a broker, dealer or municipal securities dealer that has a selling agreement with an underwriter (commonly known as “advisor-sold”) or through a website or toll-free telephone number (commonly known as “direct-sold”).

   (viii) (vii) The term “performance” shall mean total returns of the investment option, net of fees, expressed as a percentage, net of all generally applicable fees and costs.

   (ix) The term “plan” shall mean a college savings plan or program established by a state, or agency or instrumentality of a state, to operate as a Qualified Tuition Program in accordance with Section 529 of the Internal Revenue Code.

   (viii) The term “portfolio” shall mean the most basic legal entity into which account owner funds are deposited, such as a registered investment company.

   (x) (ix) The term “program manager” shall mean an entity that enters into a contract directly with the trustee of the plan to provide, directly or indirectly through service providers, investment advisory and management services, administration and accounting functions, and/or marketing and other services related to the day-to-day operation of the plan.

   (xi) (x) The term “primary offering” shall mean an offering defined in Securities Exchange Act Rule 15c2-12(f)(7).

   (xii) The term “reallocation” shall mean the withdrawal of funds from one investment option and deposit of the same funds into another investment option, such as where an account owner selects a different investment option or funds are moved from one age-band to another as beneficiaries approach college age.

   (xi) The term “strategy” shall mean a combination of more than one portfolio through which funds of account owners are allocated to achieve a particular investment outcome.

   (xiii) The term “underlying investment” shall mean a registered investment company, unit investment trust, or other investment product that is a component of an investment option.  

   (xiv) (xii) The term “underwriter” shall mean a broker, dealer or municipal securities dealer that is an underwriter, as defined in Securities Exchange Act Rule 15c2-12(f)(8), including but not limited to a broker, dealer or municipal securities dealer that acts as a primary distributor of municipal fund securities that are not local government investment pools.

   * * * * *

   Rule G-8: Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

    

    

   (a) – (f) No change.

   (g) Transactions in Municipal Fund Securities.

   (i) - (ii) No change.

   (iii) Underwriters of Municipal Fund Securities That Are Not Local Government Investment Pools.  An underwriter (as defined in Rule G-45(d)(xiv) (e)(xii)) shall maintain the information required to be reported on Form G-45.

   * * * * *

   Rule G-9: Preservation of Records

   (a) Records to be Preserved for Six Years. Every broker, dealer and municipal securities dealer shall preserve the following records for a period of not less than six years:

   (i) - (xiii) No change.

   (xiv) the records required to be maintained pursuant to Rule G-8(g)(iii).

   (b) – (g) No change.

   * * * * *

   Form G-45

   Each underwriter of a primary offering of municipal fund securities that are not interests in local government investment pools shall report to the Board the following information relating to such offering:

   (i) Plan Descriptive Information:

   (A) Name of State; 

   (B) Name of Plan; 

   (C) Name of underwriter Primary Distributor and contact information, including primary contact name, address, phone number, and email address; 

   (D) Name of Program Manager and contact information, including address and phone number; 

   (E) Plan website address, if any; and 

   (F) Marketing channel Manner of distribution. 

   (ii) Aggregate plan information: 

   (A) Total assets, as of the end of each semi-annual reporting period quarter; 

   (B) Total contributions for the most recent semi-annual reporting period quarter, and the percentage of those contributions derived from automatic contributions; 

   (C) Total distributions for the most recent semi-annual reporting period quarter; and

   (D) Fee and expense structure for fees and expenses directly or indirectly paid by account owners, as of the end of each semi-annual reporting period quarter. 

   (iii) Information regarding each investment option strategy: 

   (A) Name and type of investment option strategy; 

   (B) Inception date of investment option strategy; 

   (C) Total assets in each investment option strategy as of the end of the most recent semi-annual reporting period quarter; 

   (D) Asset classes in investment option strategy; 

   (E) Actual asset Asset class allocation of investment option as of the end of the most recent semi-annual reporting period quarter; 

   (F) Name of each underlying investment in each investment option and percentage allocation of each underlying investment in each investment option as of the end of the most recent semi-annual reporting period portfolio in each strategy and percentage allocation of each portfolio in each strategy; 

   (G) Performance data for the most recent calendar year quarter; 

   (H) Name of benchmark, if any; 

   (I) Benchmark performance data for the most recent calendar year quarter; 

   (J) Total contributions for the most recent semi-annual reporting period quarter; and 

   (K) Total distributions for the most recent semi-annual reporting period quarter. 

   (iv)  Information regarding each individual portfolio: 

   (A)  Name and type of portfolio; 

   (B)  Inception date of portfolio; 

   (C)  Total assets in each portfolio as of the end of the most recent quarter; 

   (D)  Asset classes in portfolio; 

   (E)  Asset class allocation as of the end of the most recent quarter; 

   (F)  Performance for the most recent quarter; 

   (G)  Name of benchmark, if any; 

   (H)  Benchmark performance for the most recent quarter; 

   (I)  Total contributions for the most recent quarter; and 

   (J)  Total distributions for the most recent quarter. 

   ---

   [1]  MSRB Notice 2011-33 (July 19, 2011).

   [2]  MSRB Notice 2012-40 (August 6, 2012).

   [3]  An example of a strategy would be an age-based conservative strategy that invests in a variety of equity and fixed income mutual funds, adjusting the ratio to more “conservative” fixed income funds as the beneficiary approaches college age.

   [4]  An example of a portfolio would be an underlying mutual fund or exchange traded fund.

   [5]  Letters were submitted by the College Savings Plans Network (“CSPN”) and College Savings Foundation (“CSF”) jointly, College Savings Plans of Maryland (“CSPM”), Financial Research Corporation (“FRC”), Investment Company Institute (“ICI”), Securities Industry and Financial Markets Association (“SIFMA”), Sutherland Asbill & Brennan LLP (“Sutherland”), and the Utah Educational Savings Plan (“UESP”).  Copies of comment letters are available here.

   [6]  EMMA is a registered trademark of the MSRB.

   [7]  Comments are posted on the MSRB website without change.  Personal identifying information such as name, address, telephone number, or email address, will not be edited from submissions.  Therefore, commenters should submit only information that they wish to make available publicly.

   [8]  Marked to show changes from MSRB Notice 2012-40 (August 6, 2012).  Underlining indicates new language; strikethrough denotes deletions.