[Federal Register Volume 68, Number 93 (Wednesday, May 14, 2003)]
[Notices]
[Pages 25918-25923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11998]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47815; File No. SR-MSRB-2003-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Marketing of 529 College Savings Plans in the Workplace

May 8, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'') and rule 19b-4 thereunder,\1\ notice is hereby 
given that on April 29, 2003, the Municipal Securities Rulemaking Board 
(the ``MSRB'') filed with the Securities and Exchange Commission (the 
``Commission'') a proposed rule change (File No. SR-MSRB-2003-03) (the 
``proposed rule change'') described in items, I, II, and III below, 
which items have been prepared by the MSRB. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4 thereunder.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB has filed with the Commission a proposed rule change 
consisting of an interpretive notice on marketing by brokers, dealers 
and municipal securities dealers (``dealers'') of 529 college savings 
plans in the workplace. The entire text of the proposed rule change 
appears at the end of this notice.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
item IV below. The MSRB has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    The MSRB has received a number of requests for guidance on dealer 
responsibilities under MSRB rules with respect to the marketing of 529 
college savings plans (a type of state program that issues municipal 
fund securities) through the workplace to employees. Such workplace 
marketing programs raise unique interpretive issues under MSRB rules. 
The MSRB has determined to provide interpretive guidance on the 
application of rule G-8, on recordkeeping, rule G-17, on fair dealing, 
rule G-19, on suitability, rule G-27, on supervision, and rule G-32, on 
disclosure, in the context of workplace marketing programs relating to 
529 college savings plans.
(2) Basis
    The MSRB believes that the proposed rule change is consistent with 
section 15B(b)(2)(C) of the Exchange Act, which provides that the 
MSRB's rules shall:

    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.

The MSRB believes that the proposed rule change will provide guidance 
to dealers engaged in workplace marketing programs for 529 college 
savings plans as to how to comply with MSRB rules in a manner that 
ensures that the investor protection objectives of the rules are met.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Exchange Act since it would apply equally to all 
dealers involved in workplace marketing programs for 529 college 
savings plans.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    On November 18, 2002, the MSRB published for comment draft 
interpretive notice on marketing of 529 college savings plan employee 
payroll deduction programs. The MSRB received six comment letters.\2\ 
After reviewing these comments, the MSRB approved the draft 
interpretive notice, with certain modifications, for filing with the 
SEC.\3\ The comments and the MSRB's responses are discussed below.
---------------------------------------------------------------------------

    \2\ Letter from Robert W. Berta, Jr., Vice President--
Compliance, Countrywide Investment Services, Inc. (``Countrywide''), 
to Ernesto A. Lanza, Senior Associate General Counsel, MSRB, dated 
December 17, 2002; letter from M. Shawn Dreffein, President, 
National Planning Corporation (``NPC''), to Ernesto A. Lanza, dated 
January 7, 2003; letter from Natalie A. Kavanaugh, Legal Specialist, 
Fidelity Investments (``Fidelity''), to Ernesto A. Lanza, dated 
January 9, 2003; letter from Diana F. Cantor, Chair, College Savings 
Plan Network (``CSPN'') and Executive Director, Virginia College 
Savings Plan, to Ernesto A. Lanza, dated January 10, 2003; letter 
from Stuart J. Kaswell, Senior Vice President and General Counsel, 
Securities Industry Association (``SIA''), to Ernesto A. Lanza, 
dated January 10, 2003; and letter from Tamara K. Salmon, Senior 
Associate Counsel, Investment Company Institute (``ICI''), to 
Ernesto A. Lanza, dated January 10, 2003.
    \3\ After reviewing the comments, the MSRB modified the draft 
interpretive guidance to: (i) Change the term ``introducing broker'' 
to ``selling broker;'' (ii) reflect the existence of other scenarios 
in which 529 college savings plans are marketed in the workplace; 
(iii) provide more guidance as to when dealers may rely on others to 
fulfill regulatory responsibilities; and (iv) clarify certain 
recordkeeping obligations. These revisions are described in greater 
detail below.

---------------------------------------------------------------------------

[[Page 25919]]

    NPC fully supported the draft interpretive notice, stating that it 
``clearly sets out the rationale for providing guidance in this area * 
* * [and] will make it possible for our Representatives to assist 
companies in offering 529 college savings plans to their employees.'' 
CSPN, Fidelity, ICI and SIA all generally supported the draft 
interpretive notice, although each requested that the MSRB further 
broaden and/or clarify the guidance in various respects.\4\
---------------------------------------------------------------------------

    \4\ Countrywide did not state its position regarding the draft 
interpretive notice but merely noted a possible grammatical 
correction.
---------------------------------------------------------------------------

    Fidelity, ICI and SIA requested that the MSRB substitute the term 
``selling broker'' or ``selling dealer'' for the term ``introducing 
broker'' used in the draft interpretive notice. They stated that the 
term ``introducing broker'' is used with different meanings under the 
federal securities laws applicable to other types of securities and may 
cause some confusion. In addition, SIA recommended that, for purposes 
of the interpretation, the term ``selling broker'' also encompass the 
primary distributor where it directly establishes the relationship with 
the employer. SIA stated, ``In addition to recognizing that a selling 
broker rarely, if ever, has a suitability obligation in the context of 
a payroll deduction program, the notice should clarify that a primary 
distributor who makes 529 Plan investments available through a third-
party broker would not have a suitability obligation under rule G-19, 
as it too makes no recommendation to an employee.'' The MSRB has 
changed the term ``introducing broker'' to ``selling broker'' in the 
revised interpretive notice. Contrary to SIA's statement that the 
interpretive notice recognizes ``that a selling broker rarely, if ever, 
has a suitability obligation,'' the notice does not assess the 
likelihood or frequency of recommendations being made by selling 
brokers. The notice does provide some guidance regarding the factors to 
consider when determining whether a recommendation has occurred. The 
MSRB believes that no further guidance in this area is necessary.
    CSPN, Fidelity, ICI and SIA each noted that the scenario described 
in the draft interpretive notice is not the only form in which dealers 
may seek to market 529 college savings plans through employers. In 
addition to arrangements where selling brokers having a contractual 
relationship with the primary distributor to market through employers, 
with the employees making investments directly through the primary 
distributor (as described in the draft interpretive notice), these 
commentators noted that: (1) Primary distributors may themselves market 
529 college savings plans through employers; (2) selling brokers 
sometimes have contractual relationships with the issuer rather than 
the primary distributor; (3) selling brokers may handle employee 
investments and maintain long-term relationships with employees, rather 
than merely introducing employees to the primary distributor; (4) 
transfer agents may undertake significant responsibilities in 
connection with employees' investments; and (5) employees may in some 
instances use a dealer other than the selling broker or primary 
distributor to make an investment that may still be considered part of 
the employer-sponsored program. These commentators requested that the 
MSRB address some or all of these additional scenarios. In addition, 
CSPN suggested that the MSRB make clear that the scenarios addressed in 
the draft interpretive notice are illustrative and that other models 
may be implemented.
    The MSRB has made significant modifications to the initial 
paragraphs of the notice to reflect the existence of these other 
scenarios. No significant change in interpretation results from a 
primary distributor acting in the role of a selling broker. The 
identity of the selling broker's counterparty on the selling agreement 
also does not significantly change its regulatory obligations. Selling 
brokers that make recommendations remain fully obligated under MSRB 
rules and remain ultimately responsible where the primary distributor 
has not affirmatively undertaken regulatory obligations on behalf of 
the selling broker (as discussed below). The guidance provided by the 
notice is primarily intended for dealers that are formally involved in 
a workplace marketing program; thus, the notice is of limited 
applicability to dealers that do not have a formal role in such a 
program.
    Fidelity observed that the draft interpretive notice referred to 
on-line enrollment with the primary distributor and noted that in many 
circumstances enrollment and investments continue to be handled by 
mail. Also, Fidelity, ICI and SIA noted that other forms of payment, 
such as ACH (automated clearing house) bank transfers, may be used in 
addition to traditional employee payroll deductions. These commentators 
requested that the MSRB recognize these variants in its final notice. 
The revised interpretive notice now more clearly acknowledges these 
different processes.
    CSPN, Fidelity, ICI and SIA sought further clarification on the 
circumstances under which selling brokers may rely on other parties to 
meet their regulatory obligations. CSPN and SIA stated that dealers 
should be able to rely on issuers to distribute official statements to 
customers. CSPN noted its concern that customers may be confused by the 
receipt of redundant (and possibly out-dated) disclosure documents if 
dealers must deliver official statements regardless of whether the 
issuer has sent them to customers. SIA suggested that the ability of 
the selling broker to rely on the primary distributor for delivery of 
the official statement as provided in the draft interpretive notice be 
extended to the ability to rely on other parties, such as other 
dealers, employers and issuers.
    The revised interpretive notice permits a selling broker to 
conclusively rely on the primary distributor to meet its disclosure 
obligations and certain supervisory obligations (described below) only 
under the limited circumstances in which employee orders are not 
accepted without actual delivery of the official statement and the 
primary distributor has affirmatively agreed to undertake such 
regulatory obligations on behalf of the selling broker. In such 
circumstances, the primary distributor will be responsible for 
fulfilling such obligations. In all other circumstances, the notice 
clarifies that a selling broker may agree with another party to take 
certain actions on its behalf but that if such other party fails to 
take such actions, the selling broker remains responsible for 
fulfilling its regulatory obligation.
    ICI suggested that the MSRB should permit selling brokers to enter 
into arrangements with the primary distributor to meet their 
supervisory obligations to review and approve customer accounts and 
transactions based upon having procedures in place that provide 
assurances to the selling brokers that such review and approval is 
being undertaken by the primary distributor. SIA questioned the value 
of requiring a selling broker to review customer accounts and 
transactions well after the transaction is executed, especially if the 
transaction was not recommended. In addition, SIA questioned why a 
requirement for such review and related recordkeeping would be 
dependent upon whether the selling broker receives compensation for a 
transaction.

[[Page 25920]]

    The revised interpretive notice clarifies that, where a selling 
broker does not make a recommendation and the primary distributor 
affirmatively agrees to take on both the disclosure responsibilities 
and the supervisory responsibilities with regard to opening of accounts 
and approval of transactions, the regulatory obligation may be shifted 
to the primary distributor. However, supervisory responsibility remains 
with the selling broker so long as the selling broker retains any 
affirmative duties to employees. The MSRB believes that the limited 
recordkeeping obligations imposed on all selling brokers in the notice 
are appropriate. The revised interpretive notice makes clear that the 
limited recordkeeping requirements that remain for subsequent 
transactions effected by the primary distributor where compensation is 
paid to the selling broker applies only when such compensation is 
transaction based since, depending on the facts and circumstances, this 
information may be necessary to determine compliance with MSRB's fair 
pricing and fair commission requirements.
    With respect to transfer agents, SIA noted that many plans provide 
for applications and customer orders to be sent directly to a transfer 
agent, with the primary distributor's activities ``limited to managing 
the overall marketing of the program and the production of marketing 
and promotional materials.'' SIA stated that, ``only the transfer agent 
maintains any investor records and these records are the plan's 
investor records. Thus, in this model, the primary distributor's 
regulatory responsibilities are limited primarily to compliance with 
applicable rules governing marketing materials but not those rules 
mandating customer account related procedures.'' SIA sought assurance 
that primary distributors did not retain residual customer protection 
obligations under MSRB rules in the scenario where applications and 
orders are submitted directly to the transfer agent.
    The MSRB notes that transfer agents generally are viewed under the 
Exchange Act as working on behalf of the issuer but that, in the 529 
college savings plan market, transfer agents also sometimes 
contractually agree to act on behalf of the primary distributor. In the 
revised interpretive notice, where transactions are effected through a 
transfer agent without the direct involvement of the primary 
distributor or the selling broker, the selling broker is permitted to 
conclusively rely on the primary distributor to fulfill certain of the 
selling broker's regulatory obligations only if the transfer agent has 
contractually agreed to act on behalf of the primary distributor. 
Otherwise, the transfer agent is effectively treated as an agent of the 
issuer and the dealer that enlisted the corresponding employer to 
participate in the workplace marketing plan remains ultimately 
responsible for compliance with MSRB rules.
    SIA asked why a selling broker would have a fair dealing obligation 
under rule G-17 to an employer since the employer is not the dealer's 
client. SIA also sought guidance regarding the nature of information 
that a dealer would be obligated to provide to the employer under the 
rule G-17 disclosure obligation. ICI and SIA also questioned the need 
for the selling broker to maintain a record of the name and address of 
an employer that the dealer solicited, as well as for principal review 
of such solicitation. CSPN sought assurances that the fair dealing 
obligation toward the employer would not give rise to any inference 
that the issuer has any Federal securities law obligation to employers 
under the scenario described in the draft interpretive notice.
    The fair dealing requirement of rule G-17 applies, on its face, to 
all persons, not just customers. The MSRB believes that it 
appropriately applies to the selling broker's relationship with 
employers, particularly since the selling broker is inducing the 
employer to create a captive audience of investors and the employer's 
agreement to participate in the program may lead employees to believe 
that the employer endorses investment under the program. Under these 
circumstances, it is important that selling brokers provide adequate 
information regarding the program to the employer so that it can make 
an informed decision with regard to enrollment in the program. The 
limited recordkeeping regarding the employer required by the notice is 
important in the context of documenting the ability of a selling broker 
to rely on the guidance provided in the notice with respect to 
particular transactions. The revised interpretive notice provides 
assurances that a dealer's fair dealing obligation to the employer is 
not intended to imply that the issuer has a similar legal obligation to 
the employer.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
is consistent with the Exchange Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the MSRB's principal offices. 
All submissions should refer to File No. SR-MSRB-2003-03 and should be 
submitted by June 4, 2003.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.

Interpretive Notice on Marketing of 529 College Savings Plans in the 
Workplace

    The Municipal Securities Rulemaking Board (``MSRB'') has received a 
number of requests for interpretive guidance on the responsibilities of 
brokers, dealers and municipal securities dealers (``dealers'') under 
MSRB rules with respect to the marketing of 529 college savings plans 
through the workplace to employees (``workplace marketing programs''). 
Workplace marketing programs have been described to the MSRB as being 
offered through a variety of means.\1\ In many cases, a dealer 
(``selling broker'') that has signed a selling agreement with the 
primary

[[Page 25921]]

distributor of a 529 college savings plan makes available to employers 
the opportunity to initiate a workplace marketing program for those 
employees who choose to enroll and make contributions under the 529 
college savings plan.\2\ The selling broker typically meets with the 
employer's human resources/benefits representatives, who then may agree 
to have the employer participate in the workplace marketing program. 
One form of workplace marketing program provides for the employer to 
utilize its existing payroll direct deposit process for after-tax 
contributions by employees. In other cases, employee contributions may 
be effected by means of ACH (automated clearing house) bank transfers 
or other means, whether electronically or by check.
---------------------------------------------------------------------------

    \1\ The description of certain characteristics of workplace 
marketing programs in this notice is intended to illustrate the 
application of MSRB rules and is not intended to imply that 
workplace marketing programs having different characteristics are 
not permitted under MSRB rules.
    \2\ In some cases, the primary distributor itself, rather than a 
separate dealer, may initiate a workplace marketing program and 
undertake the various functions of a selling broker described in 
this notice. In other cases, the selling broker may have a 
contractual relationship with the issuer rather than with, or in 
addition to, the primary distributor.
---------------------------------------------------------------------------

    After the employer has agreed to participate in a workplace 
marketing program, its employees can establish an account in a variety 
of manners, depending upon the specific 529 college savings plan. For 
example, many workplace marketing programs provide for the employee to 
establish an account with the primary distributor by completing an 
online or paper account application and participation agreement, which 
is submitted directly to the primary distributor. In other cases, 
applications may be submitted to a transfer agent \3\ or the issuer, or 
may be handled by the selling broker itself. Typically, the selling 
broker provides the employer with materials for distribution to 
interested employees describing the particular 529 college savings 
plan, including but not limited to the program disclosure document that 
meets the definition of ``official statement'' under Exchange Act rule 
15c2-12. Further, the selling broker may, but does not always, hold 
informational meetings with employees, either in groups or 
individually. However, in many workplace marketing programs, once the 
employer has agreed to participate, employees can enroll in the program 
and make contributions directly through the primary distributor, 
transfer agent or issuer without any further involvement of the selling 
broker.
---------------------------------------------------------------------------

    \3\ Third-party transfer agents are generally considered, under 
section 3(a)(25) of the Exchange Act, to be providing services on 
behalf of the issuer of securities. The MSRB understands that, in 
the 529 college savings plan market, transfer agents may sometimes 
be engaged by the primary distributor to handle certain 
recordkeeping and processing functions on behalf of the primary 
distributor.
---------------------------------------------------------------------------

    When an employee enrolls in the workplace marketing program, 
certain information regarding the employee's enrollment is made 
available to the parties who are involved in the processing of the 
enrollment and contributions. Typically, however, the selling broker 
will receive notification of an account opening and any transactions 
effected for an individual employee only after the fact, either on a 
transaction-by-transaction basis or in periodic summaries of trade 
activities.\4\ Thus, unless the selling broker itself handles the 
enrollment and contribution functions for employees, the selling broker 
may not learn the identity of individual employees actually making 
investments in the 529 college savings plan until well after the time 
of trade and settlement on such transactions. The selling broker 
generally receives commissions on an individual participant basis for 
those employees who enroll and invest in the 529 college savings plan.
---------------------------------------------------------------------------

    \4\ Where the primary distributor itself serves in the role of 
selling broker, it will obtain information concerning the 
transaction on a timely basis where enrollment and contributions are 
effected directly with the primary distributor and, where enrollment 
and contributions are effected with a transfer agent that has a 
direct contractual relationship with the primary distributor, the 
transfer agent will obtain such information on a timely basis on 
behalf of the primary distributor.
---------------------------------------------------------------------------

    The MSRB has established a number of rules designed to protect 
customers purchasing municipal securities (including investments in 529 
college savings plans) from or through dealers. In particular, under 
rule G-19, a dealer that recommends a 529 college savings plan 
transaction to a customer must have reasonable grounds for believing 
that the recommendation is suitable, based upon information available 
from the issuer or otherwise and the facts disclosed by or otherwise 
known about the customer. To assure that a dealer effecting a 
recommended transaction with a non-institutional customer has the 
information needed about the customer to make its suitability 
determination, the rule requires the dealer to make reasonable efforts 
to obtain information concerning the customer's financial status, tax 
status and investment objectives, as well as any other information 
reasonable and necessary in making the recommendation. In addition, the 
dealer has certain disclosure-related obligations to the customer, 
regardless of whether the dealer has recommended a particular 
transaction to the customer. For example, under rule G-32, the dealer 
is obligated to deliver an official statement to the customer by 
settlement of the transaction.\5\
---------------------------------------------------------------------------

    \5\ In the case of a repeat purchaser who has already received 
the official statement, dealers generally are required to deliver 
any amendments or supplements to the official statement in 
connection with subsequent investments in the 529 college savings 
plan.
---------------------------------------------------------------------------

    Further, under rule G-17, each dealer, in the conduct of its 
municipal securities activities, must deal fairly with all persons and 
must not engage in any deceptive, dishonest or unfair practice. This 
rule has been interpreted to require a dealer to disclose to its 
customer, at or before the time of trade, all material facts concerning 
the transaction known by the dealer, as well as material facts about 
the security when such facts are reasonably accessible to the 
market.\6\ This rule G-17 disclosure obligation applies regardless of 
whether the dealer has made a recommendation to the customer. If the 
customer is investing in an out-of-state 529 college savings plan, the 
dealer also is obligated to inform the customer that, depending upon 
the laws of the customer's home state, favorable state tax treatment 
for investing in a 529 college savings plan may be limited to 
investments made in a plan offered by the customer's home state.\7\ 
Further, rule G-17 prohibits the dealer from misleading customers 
regarding facts material to the transaction, including but not limited 
to the availability of state tax benefits in connection with an 
investment in a 529 college savings plan.\8\
---------------------------------------------------------------------------

    \6\ See rule G-17 Interpretation--Interpretive Notice Regarding 
Rule G-17, on Disclosure of Material Facts, March 20, 2002, MSRB 
Rule Book.
    \7\ See rule G-21 Interpretation--Application of Fair Practice 
and Advertising Rules to Municipal Fund Securities, May 14, 2002, 
MSRB Rule Book.
    \8\ Id.
---------------------------------------------------------------------------

    A dealer is obligated under rule G-17 to deal fairly not only with 
customers but with all persons in connection with the conduct of its 
municipal securities activities. Thus, in addition to dealing fairly 
with employees that have agreed to participate in a workplace marketing 
program, a selling broker that enters into a formal or informal 
agreement with an employer to undertake a workplace marketing program 
also is obligated under rule G-17 to deal fairly with the employer 
itself.\9\ Whether a dealer has

[[Page 25922]]

dealt fairly with an employer is dependent upon the facts and 
circumstances. However, the MSRB believes that, under these 
circumstances, rule G-17 obligates the selling broker to disclose to 
the employer all material facts known by the selling broker concerning 
the transactions it is attempting to induce, as well as material facts 
about the security when such facts are reasonably accessible to the 
market. If the selling broker knows or has reason to know that one or 
more employees may not be resident in the state of the 529 college 
savings plan being offered under the workplace marketing program, rule 
G-17 requires the selling broker to disclose to the employer that, 
depending upon the laws of the state of residence of an employee, 
favorable state tax treatment for investing in a 529 college savings 
plan may be limited to investments made in a 529 college savings plan 
offered by the employee's home state. These are the same disclosures 
that a dealer effecting a transaction with individual customers is 
required to make under rule G-17.
---------------------------------------------------------------------------

    \9\ Under section 15B(c)(1) of the Exchange Act, any dealer that 
attempts to induce the purchase of municipal securities must do so 
in compliance with MSRB rules. This would include an attempt by a 
selling broker (or a primary distributor acting in the role of a 
selling broker) to induce employees to invest in a 529 college 
savings plan through an employer participating in a workplace 
marketing program. Thus, the selling broker generally will become 
obligated to comply with the duties established under rule G-17 with 
respect to the employer in connection with the procurement of the 
employer's agreement to participate in the workplace marketing 
program, even if there is no assurance that any employee ultimately 
will enroll. This obligation would not apply to an issuer if its own 
personnel or agents of the issuer were to initiate a workplace 
marketing program with an employer, as MSRB rules do not apply to 
issuers.
---------------------------------------------------------------------------

    Where a selling broker has recommended a transaction in a 529 
college savings plan to an employee through a workplace marketing 
program, the selling broker is fully obligated to make a suitability 
determination under rule G-19.\10\ The selling broker would be 
responsible for obtaining and maintaining the information required 
under rule G-19(b) in connection with such suitability determination 
and the additional information required under rule G-8(a)(xi), as well 
as for maintaining proper supervision.\11\ The MSRB has previously 
stated that whether a particular transaction is in fact recommended 
depends on an analysis of all the relevant facts and circumstances.\12\ 
Among the facts and circumstances that generally would be relevant in 
this context is the nature of the statements made by the selling broker 
if it conducts any informational meetings with employees. If, for 
example, the selling broker conducts an employee informational meeting 
at which it states that the particular 529 college savings plan is 
appropriate for most or all employees, or at which it advises 
individual employees that the plan or specific investment options 
within the plan are appropriate for such individuals, the introducing 
broker most likely has made a recommendation. If, however, the selling 
broker provides, at most, only generalized recommendations about the 
529 college savings plan accompanied by clear statements that 
enrollment in this particular 529 college savings plan or investment in 
any particular investment option within the plan may not be appropriate 
for all employees, the selling broker must have reasonable grounds for 
the generalized recommendation in light of the information about the 
security but need not make a determination that the investment is 
suitable for each employee in attendance.\13\ A selling broker making a 
recommendation to a particular employee also is fully responsible for 
providing the required disclosure information under rules G-17 and G-
32.
---------------------------------------------------------------------------

    \10\ A selling broker that recommends a transaction to an 
employee cannot avoid its suitability obligations and related duties 
simply because the employee places its order directly with the 
primary distributor, transfer agent or issuer. In addition, a 
primary distributor acting in the role of a selling broker that 
recommends a transaction to an employee cannot avoid its suitability 
obligations and related duties simply because the employee places 
its order directly with the issuer or transfer agent.
    \11\ Rule G-27 requires an appropriate principal to review the 
opening of each customer account and of each transaction for such 
customer. In addition, rules G-8 and G-9 require dealers to create 
and preserve certain records in connection with such accounts and 
transactions.
    \12\ See rule G-19 Interpretive Letter--Recommendations, 
February 17, 1998, MSRB Rule Book. The MSRB also has provided 
guidance on recommendations in the context of on-line communications 
in rule G-19 Interpretation--Notice Regarding Application of Rule G-
19, on Suitability of Recommendations and Transactions, to Online 
Communications, September 25, 2002, MSRB Rule Book.
    \13\ See rule G-19 Interpretation--Notice Concerning the 
Application of Suitability Requirements to Investment Seminars and 
Customer Inquiries Made in Response to a Dealer's Advertisements, 
May 7, 1985, MSRB Rule Book.
---------------------------------------------------------------------------

    If a selling broker does not make a recommendation in connection 
with a transaction in a 529 college savings plan by an employee through 
a workplace marketing program, it has no suitability obligation under 
rule G-19. Although the selling broker still would be obligated to 
provide the required disclosures under rules G-17 and G-32, if all 
employee transactions under the workplace marketing program are handled 
by the primary distributor or a transfer agent that has contractually 
agreed to act on behalf of the primary distributor, the selling 
broker's responsibilities will be conclusively fulfilled if the placing 
of an order in that manner is conditioned upon actual receipt of the 
official statement and the primary distributor has formally agreed to 
be responsible for such delivery.\14\ For example, if employees make 
investments directly through the primary distributor's Web site and the 
Web site requires that investors first view or download the official 
statement before being allowed to complete transactions, then the 
selling broker would be able to conclusively rely on this method of 
delivery for purposes of fulfilling its disclosure requirements.\15\ 
However, if the primary distributor does not provide assurances that 
necessary disclosures will be made to employees, the selling broker 
will be required to provide such disclosures.\16\ The selling broker 
must put in place appropriate supervisory procedures to ensure that 
required disclosures are provided in a satisfactory manner where it is 
not entitled to conclusively rely on the primary distributor as 
described above.
---------------------------------------------------------------------------

    \14\ Under these circumstances, the primary distributor could be 
held responsible for any failures to meet the disclosure 
requirements of rules G-17 and G-32. In addition, the primary 
distributor should note that, if the official statement omits 
material information that it would be obligated to provide under 
rule G-17, the primary distributor would be responsible for 
providing such omitted information.
    \15\ The MSRB has provided guidance on electronic delivery of 
required disclosure information in rule G-32 Interpretation--Notice 
Regarding Electronic Delivery and Receipt of Information by Brokers, 
Dealers and Municipal Securities Dealers, November 20, 1998, MSRB 
Rule Book. Arrangements assuring actual delivery of the official 
statement to employees may also be possible in circumstances where 
paper applications and participation agreements are mailed directly 
to the primary distributor or its transfer agent.
    \16\ Selling brokers would be advised, for example, to provide 
official statements to the employer's human resource/employee 
benefits department and at any employee informational meetings that 
it attends. The selling broker may enter into contractual 
arrangements whereby the primary distributor, transfer agent, issuer 
or other party agrees to provide the required disclosures to 
employees. However, except as described above, the selling broker 
will be responsible for any failure by such third party to meet its 
contractual delivery obligation.
---------------------------------------------------------------------------

    In addition, where a selling broker is entitled to conclusively 
rely on disclosures provided by the primary distributor or transfer 
agent (as described in the preceding paragraph) and the transaction is 
not recommended, the selling broker may conclusively rely on the 
primary distributor to fulfill the selling broker's supervisory 
obligation to review and approve customer accounts and transactions 
under rule G-27(c)(iii) and (vii) for such accounts and transactions if 
the primary distributor has formally agreed to be responsible for such

[[Page 25923]]

supervision.\17\ Under circumstances where such conclusive reliance is 
not available to the selling broker, the selling broker may fulfill 
these supervisory obligations by reviewing and approving individual 
account openings and transactions as information becomes available from 
the primary distributor, transfer agent or other relevant party. In all 
cases of non-recommended transactions, the selling broker must 
undertake prompt reviews and approvals of agreements obtained from 
employers to participate in a workplace marketing program and for 
recording account information under rule G-8(a)(ii) and customer 
specific information for each enrolled employee required under rule G-
8(a)(xi) (of which only information under items (A), (C), (E) and (H) 
thereunder shall be required) as it becomes available. A selling broker 
wishing to rely on the guidance provided in this notice also is 
required to record the name and principal business address of any 
employer agreeing to participate in a workplace marketing program, 
together with the signature of an appropriate principal approving such 
agreement. Selling brokers are reminded that the conclusive reliance 
permitted by this paragraph and the preceding paragraph is not 
available in the case of recommended transactions, in which case the 
selling broker retains the primary obligation to fulfill all customer 
protection, disclosure, supervisory and recordkeeping duties.
---------------------------------------------------------------------------

    \17\ Under these circumstances, the primary distributor could be 
held responsible for any failures to meet such supervisory 
obligations.
---------------------------------------------------------------------------

    Dealers should note that none of the foregoing obviates the need 
for primary distributors to fulfill all of their customer protection 
obligations under MSRB rules where a selling broker is not otherwise 
required to fulfill such obligations. Furthermore, if transactions 
subsequent to the initial enrollment of an employee in a workplace 
marketing program are effected directly between the employee and the 
primary distributor, the primary distributor generally will have sole 
responsibility with respect to compliance with MSRB rules in connection 
with such subsequent transactions, provided that the selling broker 
will be required to record information regarding subsequent 
transactions as required under rule G-8(a)(ii) to the extent that it 
receives transaction-based compensation for such transactions. Dealers 
also should note that, if employees make their purchases directly from 
the governmental issuer (whether through the issuer's own employees or 
any non-dealer agent of the issuer), the selling broker or primary 
distributor that enlists an employer to participate in a workplace 
marketing program is ultimately responsible for fulfilling all of its 
obligations under MSRB rules. Thus, for example, although an issuer may 
undertake to provide disclosure materials to investors, the dealer 
remains responsible under MSRB rules should the issuer fail to deliver 
the required disclosures to an employee who enrolls in a 529 college 
savings plan through a workplace marketing program promoted by the 
dealer acting as a selling broker, or if such disclosure information is 
not delivered in a timely manner.

[FR Doc. 03-11998 Filed 5-13-03; 8:45 am]
BILLING CODE 8010-01-P