[Federal Register Volume 70, Number 131 (Monday, July 11, 2005)]
[Notices]
[Pages 39833-39836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3615]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51951; File No. SR-MSRB-2005-09]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Relating to Month-End 
Performance Data for Municipal Fund Securities Under MSRB Rule G-21

June 30, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 2, 2005, the Municipal Securities Rulemaking Board (``MSRB'' or 
``Board'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB has filed with 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. The MSRB proposes that dealers be required 
to comply with the proposed rule change

[[Page 39834]]

for advertisements of municipal fund securities submitted or caused to 
be submitted for publication on or after December 1, 2005. The text of 
the proposed rule change is available on the MSRB's Web site (http://www.msrb.org), at the MSRB's principal office, and at the Commission's 
Public Reference Room.

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 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'').\3\ 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 \4\ 
(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 Web site 
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.
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    \3\ See Exchange Act Release No. 51736 (May 24, 2005), 70 FR 
31551 (June 1, 2005).
    \4\ 15 U.S.C. 77a et seq.
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    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 \5\ 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 Web site identified in the advertisement and the 
month to which such information is current is identified; or
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    \5\ The term ``use'' is used with the same meaning as in 
Securities Act Rule 482.
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    (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 Web site where an 
investor may obtain total return quotations current to the most recent 
month-end for which such return is available.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act,\6\ which provides that the MSRB's 
rules shall:

    \6\ 15 U.S.C. 78o-4(b)(2)(C).
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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 is consistent with 
the Act because it will further investor protection by making 
information provided in advertisements of municipal fund securities 
more up-to-date and more comparable among different municipal fund 
securities investments and between municipal fund securities and 
registered mutual funds.

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

    The MSRB does not believe that the proposed rule change will result 
in any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act since it would apply equally to 
all dealers.

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

    On December 16, 2004, the MSRB published for comment a draft 
amendment to Rule G-21 with respect to advertisements of municipal fund 
securities.\7\ The MSRB received four comment letters.\8\ ICI, CSF and 
Vanguard fully support the draft amendments, while CSPN is 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 amendments, with certain modifications described 
below, for filing with the SEC.
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    \7\ See MSRB Notice 2004-43 (December 16, 2004).
    \8\ Letter from David J. Pearlman, Chairman, College Savings 
Foundation (``CSF''), to Ernesto A. Lanza, dated January 14, 2005; 
letter from Tamara K. Salmon, Senior Associate Counsel, Investment 
Company Institute (``ICI''), to Ernesto A. Lanza, dated January 19, 
2005; letter from Heidi Stam, Principal, Securities Regulation, 
Vanguard Group, Inc. (``Vanguard''), to Ernesto A. Lanza, dated 
January 19, 2005; and letter from Tim Berry, Chair, College Savings 
Plan Network (``CSPN''), and Indiana State Treasurer, to Ernesto A. 
Lanza, dated January 27, 2005.
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Impact on State 529 Plan Community
    Comments Received. CSPN states that it has conducted an informal 
poll of its issuer members regarding the impact of the draft amendments 
on their activities. CSPN notes 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. 
CSPN states that most (but not all) issuers that

[[Page 39835]]

do not meet the seven business day timeframe indicate that 10 business 
days would be an appropriate outside posting date.
    CSPN also notes that some issuers express 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.'' 
CSPN observes 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.'' CSPN states:

    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 express to CSPN include initial and 
ongoing costs of implementing appropriate procedures to assure 
compliance and the speed at which such procedures can be put in place. 
CSPN argues 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 Web 
site.''
    With respect to specific elements of the draft amendments, CSPN 
seeks 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, CSPN requests 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, CSPN suggests 
that such deadline be extended to 15 business days. In addition, CSPN 
states 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.\9\ 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.
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    \9\ This presumption may be lost if the dealer itself causes a 
material delay in the issuer's calculation of performance or if the 
issuer fails to fulfill its undertaking on a consistent basis.
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    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. Vanguard recommends that the MSRB require 
additional disclosures in advertisements that include performance data. 
Vanguard states:

    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.

    Vanguard observes 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. Vanguard notes 
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.\10\ Vanguard states, however, 
that it does not support NASD's formatting requirements with respect to 
such disclosure.
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    \10\ See Exchange Act Release No. 50226 (August 20, 2004), 69 FR 
52738 (August 27, 2004) (SR-NASD-2004-043).
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    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

[[Page 39836]]

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. CSF requests that the draft amendments have an 
effective date of 180 days after SEC approval. CSPN also requests a 
delayed effectiveness of 180 days if the MSRB maintains specific 
deadlines for making month-end information available. The ICI 
recommends 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, the ICI requested 
that such amendments become effective 210 days after approval. The ICI 
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.\11\ 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.
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    \11\ See Exchange Act Release No. 51736 (May 24, 2005), 70 FR 
31551 (June 1, 2005).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The MSRB proposes that dealers be required 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. Within 35 days of the date of 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 such 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 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-MSRB-2005-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-MSRB-2005-09. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, 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 such 
filing also will be available for inspection and copying at the MSRB's 
offices. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
MSRB-2005-09 and should be submitted on or before August 1, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3615 Filed 7-8-05; 8:45 am]
BILLING CODE 8010-01-P