Document ID: SEC-2006-0568-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Municipal Securities Rulemaking Board
Posted Date: 2006-05-02T04:00Z

[Federal Register: May 2, 2006 (Volume 71, Number 84)]
[Notices]               
[Page 25867-25875]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02my06-104]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53715; File No. SR-MSRB-2006-03]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Consisting of 
Interpretive Guidance on Customer Protection Obligations of Brokers, 
Dealers and Municipal Securities Dealers Relating to the Marketing of 
529 College Savings Plans

April 25, 2006.
    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 March 31, 2006, 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 substantially 
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).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The MSRB is filing with the Commission a proposed rule change 
consisting of interpretive guidance on customer protection obligations 
of brokers, dealers and municipal securities dealers (``dealers'') 
relating to the marketing of 529 college savings plans. The MSRB 
proposes an effective date for the proposed rule change of 60 calendar 
days after Commission approval. 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
    In a May 14, 2002 notice (the ``2002 Notice''), the MSRB 
interpreted Rule G-17, on fair dealing, to require dealers selling out-
of-state 529 college savings plan interests to customers to disclose at 
or prior to the sale to the customer (the ``time of trade'') 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 529 college savings plan offered by 
the customer's home state.\3\ In addition, the MSRB provided guidance 
in the 2002 Notice on the application of Rule G-19, on suitability of 
recommendations and transactions, and other customer protection rules 
in the context of 529 college savings plan transactions.
---------------------------------------------------------------------------

    \3\ See Rule G-21 Interpretation--Application of Fair Practice 
and Advertising Rules to Municipal Fund Securities, May 14, 2002, 
reprinted in MSRB Rule Book.
---------------------------------------------------------------------------

    The proposed rule change broadens the existing time-of-trade 
disclosure obligation with respect to the marketing of out-of-state 529 
college savings plans. Under the proposed rule change, dealers selling 
out-of-state 529 college savings plan interests are required to 
disclose to the customer, at or prior to the time of trade, that: (i) 
Depending on the laws of the home state of the customer or designated 
beneficiary, favorable state tax treatment or other benefits offered by 
such home state may be available only if the customer invests in the 
home state's 529 college savings plan; (ii) state-based benefits should 
be one of many appropriately weighted factors to be considered in 
making an investment decision; and (iii) the customer should consult 
with his or her financial, tax or other adviser about how such state-
based benefits would apply to the customer's specific circumstances and 
may wish to contact his or her home state or any other 529 college 
savings plan to learn more about their features. Guidance is provided 
as to the manner of delivering this revised out-of-state disclosure to 
ensure that such information is noted by the customer, and dealers are 
reminded that all disclosures made to customers, regardless of whether 
they are made pursuant to a regulatory mandate, must not be false or 
misleading.
    The proposed rule change further reminds dealers that providing 
disclosures to customers does not relieve them of their suitability 
duties--including their obligation to consider the customer's financial 
status, tax status and investment objectives--arising in connection 
with recommended transactions. The proposed rule change describes 
certain basic suitability principles applicable to recommended 
transactions in 529 college savings plans, advising dealers to consider 
whether a recommendation is consistent with the customer's tax status 
and any federal or state tax-related investment objectives of the 
customer. The proposed rule change emphasizes that any dealer that 
recommends a transaction must undertake an active suitability process 
involving a meaningful analysis that takes into consideration 
information about the customer and the security. Dealers are further 
advised that suitability determinations should be based on the various 
appropriately weighted factors that are relevant in any particular set 
of facts and circumstances. Finally, the proposed rule change reaffirms 
existing guidance from the 2002 Notice on other customer protection 
obligations applicable to dealer sales practices in the 529 college 
savings plan market.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act,\4\ which provides that the MSRB's 
rules shall:
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78o-4(b)(2)(C).

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 strengthening and 
clarifying dealers' customer protection obligations relating to the 
marketing of 529 college savings plans, including but not limited to 
the duty to provide important disclosures to customers investing in 
out-of-state 529 college

[[Page 25868]]

savings plans and to undertake active suitability analyses for 
recommended transactions based on appropriately weighted factors.

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 June 10, 2004, the MSRB published for comment draft interpretive 
guidance relating to, among other things, the disclosure obligations of 
dealers selling out-of-state 529 college savings plans, strengthening 
the out-of-state disclosures originally mandated in the 2002 Notice 
(the ``2004 Proposal'').\5\ The MSRB received comments on the 2004 
Proposal from eight commentators.\6\ After reviewing these comments, 
considering the concerns of NASD and others regarding high levels of 
out-of-state sales and consulting with Commission staff, the MSRB 
published on May 19, 2005 a notice seeking further comment on a revised 
version of the draft interpretive guidance (the ``2005 Proposal'').\7\ 
The 2005 Proposal included a discussion of existing resources and 
challenges in connection with obtaining disclosure information in the 
529 college savings plan marketplace and sought comment on the possible 
substantial expansion of the disclosure and suitability obligations 
described in the 2002 Notice. The MSRB received comments on the 2005 
Proposal from 22 commentators.\8\
---------------------------------------------------------------------------

    \5\ See MSRB Notice 2004-16 (June 10, 2004). The 2004 Proposal, 
together with a related proposal (MSRB Notice 2004-17 (June 15, 
2004)), represented a comprehensive initiative of the MSRB to 
strengthen a broad range of customer protection obligations set out 
in the 2002 Notice. Portions of the 2004 Proposal significantly 
strengthening 529 college savings plan advertising requirements have 
been adopted, with certain additional requirements and 
modifications, by the MSRB and approved by the Commission. See 
Exchange Act Release No. 51736 (May 24, 2005), 70 FR 31551 (June 1, 
2005). See also Exchange Act Release No. 52289 (August 18, 2005), 70 
FR 49699 (August 24, 2005). In addition, the strengthened customer 
protection obligations with respect to 529 college savings plan 
sales incentives proposed in the related June 15, 2004 proposal have 
been adopted by the MSRB and approved by the Commission. See 
Exchange Act Release No. 52555 (October 3, 2005), 70 FR 59106 
(October 11, 2005). The current proposed rule change represents the 
final stage of the MSRB's 2004 customer protection initiative.
    \6\ Letters from: Kenneth B. Roberts, Hawkins Delafield & Wood 
LLP (``Hawkins''), to Ernesto A. Lanza, Senior Associate General 
Counsel, MSRB, dated August 20, 2004; Mary L. Schapiro, Vice 
Chairman, NASD, and President, Regulatory Policy and Oversight, to 
Mr. Lanza, dated September 9, 2004; Tamara K. Salmon, Senior 
Associate Counsel, Investment Company Institute (``ICI''), to Mr. 
Lanza, dated September 10, 2004; David J. Pearlman, Chairman, 
College Savings Foundation (``CSF''), to Mr. Lanza, dated September 
13, 2004; Elizabeth L. Bordowitz, General Counsel, Finance Authority 
of Maine (``FAME''), to Mr. Lanza, dated September 13, 2004; Diana 
F. Cantor, Chair, College Savings Plan Network (``CSPN''), and 
Executive Director, Virginia College Savings Plan, to Mr. Lanza, 
dated September 15, 2004; Elizabeth Varley and Michael D. Udoff, Co-
Staff Advisers, Securities Industry Association (``SIA'') Ad Hoc 529 
Plans Committee, to Mr. Lanza, dated September 15, 2004; and Raquel 
Alexander, PhD, Assistant Professor, and LeAnn Luna, PhD, Assistant 
Professor, University of North Carolina at Wilmington (``UNCW''), to 
Mr. Lanza, dated September 15, 2004.
    \7\ See MSRB Notice 2005-28 (May 19, 2005).
    \8\ Letters from: Ms. Alexander, Assistant Professor of 
Accounting, University of Kansas, and Ms. Luna, Assistant Professor 
of Accounting, University of Tennessee (``Alexander & Luna''), to 
Mr. Lanza, dated July 26, 2005; Judith A. Wilson, Compliance 
Attorney, 1st Global Capital Corp. (``1st Global''), to Mr. Lanza, 
dated July 28, 2005; Diana Scott, Senior Vice President & General 
Manager, John Hancock Financial Services (``Hancock''), to Mr. 
Lanza, dated July 28, 2005; John C. Heywood, Principal, Vanguard 
Group, Inc. (``Vanguard''), to Mr. Lanza, dated July 28, 2005; Mr. 
Pearlman, CSF, to Mr. Lanza, dated July 29, 2005 and February 13, 
2006; Tim Berry, Chair, CSPN, and Indiana State Treasurer, to Mr. 
Lanza, dated July 29, 2005; Ms. Salmon, ICI, to Mr. Lanza, dated 
July 29, 2005; Jacqueline T. Williams, Executive Director, Ohio 
Tuition Trust Authority (``Ohio TTA''), to Mr. Lanza and Ghassan 
Hitti, Assistant General Counsel, MSRB, dated July 29, 2005; Ira D. 
Hammerman, Senior Vice President & General Counsel, SIA, to Mr. 
Lanza, dated July 29, 2005; Ms. Cantor, Executive Director, Virginia 
College Savings Plan (``Virginia CSP''), to Mr. Lanza, dated July 
29, 2005; John D. Perdue, Chairman, Board of Trustees of the West 
Virginia College Prepaid Tuition and Savings Program, and State 
Treasurer (``West Virginia''), to Mr. Lanza, dated July 29, 2005; 
James F. Lynch, Associate Vice President for Finance, University of 
Alaska (``University of Alaska''), to Mr. Lanza, dated July 29, 
2005; Eileen M. Smiley, Vice President & Assistant Secretary, USAA 
Investment Management Company (``USAA''), to Mr. Lanza, dated July 
29, 2005; Ronald C. Long, Senior Vice President, Wachovia 
Securities, LLC (``Wachovia''), to Mr. Lanza, dated July 29, 2005; 
Michael L. Fitzgerald, State Treasurer of Iowa (``Iowa''), to Mr. 
Lanza, received August 1, 2005; Henry H. Hopkins, Vice President, 
Director & Chief Legal Counsel, T. Rowe Price Investment Services, 
Inc. (``T. Rowe''), to Mr. Lanza, dated August 1, 2005; Thomas M. 
Yacovino, Vice President, A.G. Edwards and Sons, Inc., (``AG 
Edwards''), to Mr. Lanza, dated August 3, 2005; W. Daniel Ebersole, 
Director, Georgia Office of Treasury and Fiscal Services 
(``Georgia''), to Mr. Lanza, dated August 4, 2005; Nancy K. Kopp, 
Treasurer, State of Maryland, and Chair, College Savings Plans of 
Maryland (``CSP-Maryland''), to Mr. Lanza, dated August 10, 2005; 
Mr. Pearlman, Senior Vice President and Deputy General Counsel, 
Fidelity Investments (``Fidelity''), to Mr. Lanza, dated December 7, 
2005; James W. Pasman, Senior Vice President & Managing Director, 
PFPC Inc. (``PFPC''), to Mr. Lanza, dated December 12, 2005; and 
Randall Edwards, President, National Association of State Treasurers 
(``NAST''), and Oregon State Treasurer, to Amelia A.J. Bond, Chair, 
MSRB, dated March 20, 2006.
---------------------------------------------------------------------------

    The 2004 and 2005 Proposals, as well as the comments received on 
these proposals, are discussed below. The MSRB has considered these 
comments, together with important developments in the mechanisms for 
ensuring the free and effective flow of information to the public about 
all 529 college savings plans offered in the marketplace (discussed 
below), in determining to file this proposed rule change.
    General. The 2004 Proposal proposed expanding the existing 
obligation of dealers under the 2002 Notice to advise their out-of-
state 529 college savings plan customers of the potential loss of in-
state benefits. The 2004 Proposal did not address issues relating to 
suitability. All commentators on the 2004 Proposal supported the 
importance of ensuring some degree of disclosure to customers of the 
existence of potential in-state benefits of 529 college savings plans 
but some commentators suggested changes to the specific proposal.
    The 2005 Proposal covered a wider range of topics than the portion 
of the 2004 Proposal relating to disclosure. The 2005 Proposal sought 
to expand the time-of-trade disclosure obligation for out-of-state 
sales proposed in the 2004 Proposal to include a requirement that 
dealers identify for their out-of-state customers the specific tax and 
other benefits that each of their respective home states offer and that 
such customers would forego by investing in an out-of-state 529 college 
savings plan (the ``special home state disclosure proposal''). More 
broadly, the 2005 Proposal discussed general disclosure practices and 
mechanisms in the 529 college savings plan market, including the 
possible establishment of centralized information sources. Dealers were 
reminded that disclosures made to customers do not relieve dealers of 
their suitability duties--including their obligation to consider the 
customer's financial status, tax status and investment objectives--
arising in connection with recommended transactions. The 2005 Proposal 
discussed existing suitability standards as applied to recommendations 
of 529 college savings plan transactions and proposed expanding such 
standards to require dealers recommending out-of-state 529 college 
savings plan investments to undertake a comparative suitability 
analysis involving a comparison of the recommended out-of-state 529 
college savings plan with the customer's home state 529 college savings 
plan (the ``comparative suitability proposal''). Finally, the 2005 
Proposal discussed other sales practice obligations under the MSRB's 
fair

[[Page 25869]]

practice rule.\9\ Although some commentators supported the concept of 
centralized information sources for the 529 college savings plan market 
and the clarification of certain elements of existing basic disclosure 
and suitability obligations, the vast majority of commentators opposed 
any requirements to disclose specific in-state features foregone as a 
result of an out-of-state investment or to undertake a comparative 
suitability analysis.
---------------------------------------------------------------------------

    \9\ These provisions did not generate comments and have been 
included in the proposed rule change with only minimal 
modifications.
---------------------------------------------------------------------------

    The MSRB has determined to strengthen the existing time-of-trade 
disclosure and basic suitability obligations as applied to transactions 
in 529 college savings plans. However, in view of significant 
developments toward the maturation of the disclosure dissemination 
system for this market and with due regard to concerns expressed by the 
commentators and in press reports regarding the potentially substantial 
impact of the special home state disclosure and comparative suitability 
proposals, the MSRB has determined at this time not to adopt these two 
proposals pending further assessment of the efficacy of developments in 
the disclosure infrastructure.

Disclosure. General Time-of-Trade Disclosure Obligation and Established 
Industry Sources

    Summary. The 2005 Proposal described dealers' obligations to make 
time-of-trade disclosures of all material facts about a 529 college 
savings plan investment they are selling to their customers that are 
known to the dealer or that are reasonably accessible from established 
industry sources.\10\ The 2005 Proposal included a discussion of 
established industry sources for 529 college savings plan information 
\11\ and requested comments on whether one or more centralized Web-
based sources of information should be established by the private 
sector, industry associations or the MSRB. The 2005 Proposal noted that 
such a resource would ideally provide on-site summary information 
formatted to allow dealers and customers to make meaningful comparisons 
of the material features of 529 college savings plans, together with 
direct links to all 529 college savings plan official statements 
(typically referred to as ``program disclosure documents'') and related 
information. The types of material features summarized on such a site 
might include (among other things) state tax treatment, other state-
based benefits, costs associated with investments and performance 
information. The 2005 Proposal suggested that such a centralized Web 
site could embed within its posted summary information direct 
hyperlinks to the portions of the program disclosure document or other 
529 college savings plan materials that provide more detailed 
descriptions of the summarized information.\12\ The 2004 Proposal did 
not address these issues.
---------------------------------------------------------------------------

    \10\ Established industry sources include the system of 
nationally recognized municipal securities information repositories, 
the MSRB's Municipal Securities Information Library[supreg] system 
and Real-Time Transaction Reporting System, rating agency reports 
and other sources of information relating to the municipal 
securities transaction generally used by dealers that effect 
transactions in the type of municipal securities at issue. See Rule 
G-17 Interpretation--Interpretive Notice Regarding Rule G-17, on 
Disclosure of Material Facts, March 20, 2002, published in MSRB Rule 
Book.
    \11\ The MSRB noted that many of the traditional established 
industry sources are designed specifically for debt securities, not 
529 college savings plans, and that it viewed established industry 
sources for 529 college savings plans as encompassing a broad 
variety of information sources that professionals in this market can 
and do use to obtain material information about these investments 
and the state programs.
    \12\ The 2005 Proposal noted that the centralized Web site 
could, for example, provide hyperlinks to Web sites, or other 
contact information for sources, providing performance data current 
to the most recent month-end, as required under Rule G-21(e)(ii)(C) 
relating to 529 college savings plan advertisements containing 
performance information.
---------------------------------------------------------------------------

    Comments. Two commentators on the 2005 Proposal supported the 
establishment of a centralized Web site for summary 529 college savings 
plan information with links to 529 college savings plan materials for 
more detailed information.\13\ They stated that such a Web site would 
allow dealers and customers to make meaningful comparisons of features 
and reduce the complexity of gathering accurate, complete and timely 
information. Alexander & Luna listed what they viewed as several 
weaknesses of current third-party Web sites: (i) Information that is 
frequently out-of-date, incomplete or inaccurate; (ii) comparison 
information that is not universally available; (iii) information that 
is ``summarized at a very high level;'' (iv) Web site tools that are 
often over-simplified, which can distort results and ultimately provide 
incorrect guidance; and (v) many current Web sites that require users 
to pay for subscriptions in order to obtain basic information.
---------------------------------------------------------------------------

    \13\ 1st Global; Alexander & Luna.
---------------------------------------------------------------------------

    Many commentators opposed, or questioned the feasibility of, 
establishing a centralized Web site.\14\ Some commentators expressed 
concern that disparate features of 529 college savings plans make 
presentation of parallel information nearly impossible and that 
information presented in a summary manner may omit material information 
or portray such information inaccurately.\15\ Some commentators 
expressed concerns about potential liabilities for dealers that might 
rely on summarized information obtained from any such centralized Web 
site.\16\ Hancock stated that existing Web sites are adequate for the 
marketplace.
---------------------------------------------------------------------------

    \14\ AG Edwards, CSF, CSPN (with the concurrence of CSP-
Maryland, Georgia, Iowa, Ohio TTA, University of Alaska, Virginia 
CSP, West Virginia), Hancock, and USAA.
    \15\ CSF, CSPN, Hancock.
    \16\ Hancock, Vanguard.
---------------------------------------------------------------------------

    CSPN stated that the creation of an MSRB-sponsored Web site would 
be contrary to the municipal securities exemption under federal 
securities laws and that it is already working to address 529 college 
savings plan disclosure concerns through its disclosure principles and 
its own Web site. CSPN noted that it had recently developed Disclosure 
Principles Statement No. 2 (``DP-2'') which, ``along with the 
information available on the CSPN Web site will be the most effective 
and appropriate approach to enhancing investor accessibility to 
pertinent 529 Plan information.'' \17\ CSPN stated that DP-2 included 
``an expanded locator concept, which will assist investors in finding 
similar information in the offering materials prepared by various State 
issuers, while still using only the materials authorized by that State 
issuer.'' \18\
---------------------------------------------------------------------------

    \17\ DP-2 updated CSPN's Voluntary Disclosure Principles 
Statement No. 1 (``DP-1''), which CSPN published in 2004 to provide 
guidance to state programs in preparing their program disclosure 
documents. See also NAST.
    \18\ CSP-Maryland, Georgia, Iowa, Ohio TTA, University of 
Alaska, Virginia CSP and West Virginia supported CSPN's position.
---------------------------------------------------------------------------

    Although the 2004 Proposal did not address broader disclosure 
issues in the 529 college savings plan market, two commentators on the 
2004 Proposal made suggestions in this regard, stating that the MSRB 
should put in place a broader set of disclosure requirements to 
accompany the proposed disclosures described in the draft guidance.\19\ 
NASD suggested that the MSRB require standardized point-of-sale 
disclosure of fees and compensation in a manner similar to the point-
of-sale disclosure requirements included by the Commission in its 
proposed Exchange

[[Page 25870]]

Act Rule 15c2-3.\20\ UNCW described an academic study on factors 
influencing investor choices of 529 college savings plans and concluded 
that ``investors appear to be choosing high fee/broker sold funds 
rather than the lower fee, direct investment options * * * [and] appear 
to be ignoring state tax benefits.'' Stating that its study suggested 
that investors may not have sufficient information in these areas, UNCW 
supported mandating disclosure of not only state tax benefits but also 
uniform disclosure of fees and performance for each 529 college savings 
plan portfolio and for each underlying fund in such portfolio, as well 
as the percentage of total investments that each underlying fund 
represents with respect to such 529 college savings plan portfolio.
---------------------------------------------------------------------------

    \19\ NASD and UNCW.
    \20\ See Securities Act Release No. 8358 (January 29, 2004), 69 
FR 6438 (February 10, 2004). See also Securities Act Release No. 
8544 (February 28, 2005), 70 FR 10521 (March 4, 2005). The proposed 
rulemaking by the Commission would apply to dealer sales of 529 
college savings plan interests, in addition to sales of mutual funds 
and variable annuities. The MSRB observes that NASD has provided 
comments to the Commission on this proposal that are similar to 
those provided to the MSRB. The MSRB also has provided comments to 
the Commission in support of its point-of-sale disclosure proposal 
(available at http://www.sec.gov/ rules/proposed/s70604/ s70604-629.pdf). 

The MSRB has taken NASD's suggestions in this regard under 
advisement pending final action by the Commission on proposed Rule 
15c2-3.
---------------------------------------------------------------------------

    MSRB Response. Since publishing the 2005 Proposal, the MSRB has 
engaged the 529 college savings plan industry and other federal 
securities regulators in a dialogue regarding the 2005 Proposal. In 
particular, the MSRB has emphasized that a crucial factor underlying 
the special home state disclosure and comparative suitability proposals 
for out-of-state sales was the difficulty that the average investor 
faces in obtaining and understanding the key items of information 
relevant in making an informed investment decision in the context of 
the varied and complex national 529 college savings plan 
marketplace.\21\
---------------------------------------------------------------------------

    \21\ Investor confusion has often been reported to result from 
the large number of states offering valuable state tax or other 
benefits for investing in-state and the fact that virtually every 
plan has unique and sometimes complicated features not included in 
most other plans. The difficulties that investors face finding and 
understanding relevant information (in spite of the existence of a 
handful of Web-based resources on 529 college savings plans), as 
well as some recent steps toward improving the ability of investors 
to understand their choices in the marketplace, have been detailed 
by the press. See, e.g., Ross Kerber, ``Complaints Mounting over 
College Savings Accounts,'' Boston Globe, February 14, 2006, at 
http://www.boston.com/ business/personalfinance/articles/ 2006/02/14/

complaints-- mounting--over-- college--savings--accounts; John 
Wasik, ``How to Find the Best 529 College Savings Programs,'' 
Bloomberg.com, February 13, 2006, at http://www.bloomberg.com/ apps/

news?pid=10000039& sid=aUh68emzUVEE&refer= columnist--wasik; Albert 
B. Crenshaw, ``529 College Savings Plans and State of Confusion,'' 
Washington Post, February 12, 2006, at F8; Aleksandra Todorova, 
``529 Plans Get Report Card,'' SmartMoney.com, February 10, 2006, at 
http://www.smartmoney.com/ consumer/index.cfm?story=200602101; Jonathan 

Clements, ``Choosing a 529 College-Savings Plan: When It Makes Sense 
to Go Out of State,'' Wall Street Journal, January 4, 2006, at D1; 
Michelle Singletary, ``Get the Straight Facts on Section 529,'' 
Washington Post, December 1, 2005, at D2; Ashlea Ebling, ``College 
Savers Unite!'' Forbes.com, September 28, 2005, at http://www.forbes.com/ 

estateplanning/2005/09/27/ beltway-college-savings-cz--ae-- 
0928beltway.html.
---------------------------------------------------------------------------

    The MSRB has long been an advocate for the best possible disclosure 
practices by the 529 college savings plan community, having previously 
noted that investor protection concerns dictate that disclosure in this 
market should be based on six basic characteristics: comprehensiveness, 
understandability, comparability, universality, timeliness and 
accessibility.\22\ However, the MSRB has no authority to mandate that 
529 college savings plans make specific disclosures, including 
disclosure of costs associated with investments in the plans, 
descriptions of the state tax consequences of investing in their plans 
or in out-of-state plans, or disclosure of performance under uniform 
standards.\23\
---------------------------------------------------------------------------

    \22\ See Oversight Hearing on 529 College Savings Plans, Hearing 
Before the Subcomm. on Financial Management, The Budget, and 
International Security of the Senate Comm. on Governmental Affairs, 
108th Cong. (Sept. 30, 2004) (testimony of Ernesto A. Lanza, Senior 
Associate General Counsel, MSRB).
    \23\ When dealers market 529 college savings plans, the MSRB 
requires time-of-trade disclosures of material information to 
customers, including but not limited to disclosure of the possible 
loss of state tax benefits if investing out-of-state. Proposed 
Exchange Act Rule 15c2-3, if adopted, would mandate that point-of-
sale fee disclosures be made by dealers in a uniform manner. 
Furthermore, the MSRB has adopted uniform requirements for the 
calculation and presentation of up-to-date performance data in 529 
college savings plan advertisements published by dealers that also 
require that advertisements disclose the possible loss of state tax 
benefits if investing out-of-state.
---------------------------------------------------------------------------

    The MSRB is of the view that a more comprehensive and user-friendly 
system of established industry sources is needed in the 529 college 
savings plan market. Such a system would be based on centralized Web 
sites providing direct access to official issuer disclosure materials 
for the entire universe of 529 college savings plan offerings, together 
with understandable educational information and tools allowing for 
side-by-side comparisons of different 529 college savings plans. It is 
crucial for ensuring that dealers and other investment professionals 
seeking to provide advice to their customers on their college savings 
options are able to do so with a full view of the available 
alternatives. In addition, this maturation of the disclosure 
dissemination system for the 529 college savings plan market would be 
particularly crucial to allowing customers to have direct access to the 
types of information and other resources they need to make informed 
investment decisions, thereby promoting investor confidence in their 
own abilities to make such informed choices, whether with the advice of 
an investment professional or as a self-directed investor.
    The MSRB understands that CSPN has undertaken to upgrade its 
existing Web site to provide a comprehensive centralized Web-based 
utility for the 529 college savings plan market.\24\ This CSPN utility 
is expected to provide a combination of on-site and hyperlinked 
resources, including summary information formatted to allow meaningful 
comparisons of many of the material features of different 529 college 
savings plans, together with direct links to all 529 college savings 
plan program disclosure documents and related information as well as to 
other sources providing tools designed for analyzing potential 529 
college savings plan investments. The MSRB understands that the types 
of material features to be disclosed through this utility include, but 
are not limited to, state tax treatment and other state-based benefits, 
costs associated with investments, types of underlying investments, 
performance information and other important features that can vary 
considerably from state to state, with hyperlinks embedded within such 
summary information providing direct links to a full description of 
such specific feature in the issuer's official program disclosure 
document or other reliable sources. CSPN has also recently published 
its DP-2, which updates its baseline disclosure standards designed to 
assist the states in improving the quality and comparability of their 
529 college savings plan disclosures in the program disclosure 
document. In the 2005 Proposal, the MSRB had urged CSPN and the 
individual 529 college savings plans to strive for the maximum possible 
ease of access to, and uniformity of content in, the program disclosure 
documents consistent with providing information that is complete, 
understandable and not misleading. The MSRB views the upcoming 
implementation of the CSPN Web site disclosure utility and the 
development and universal adoption of DP-2 as significant steps toward 
achieving the goals the MSRB had set out for the 529 college savings 
plan market.
---------------------------------------------------------------------------

    \24\ NAST. CSPN is an affiliate of NAST.
---------------------------------------------------------------------------

    The CSPN utility will join other commercial, industry group and

[[Page 25871]]

regulator Web-based resources providing useful information for 
individuals seeking to save for college expenses and for investment 
professionals active in the 529 college savings plan market. Several 
commercial ventures already provide, in summary and often tabular form, 
some categories of information for all available 529 college savings 
plans. Such information can include fees and expenses, minimum and 
maximum investments, nature of the underlying investments, distribution 
channels, and state tax treatment, as well as proprietary ratings based 
on varying criteria. Much of this information is available at no cost, 
with some sources making available, for a fee, premium or membership-
based services for professionals that provide greater detail or more 
comprehensive analyses of the available information. Many of these 
commercial Web sites have taken recent steps to augment and refine the 
information they offer to the public, and the MSRB understands that 
alternative pricing structures suitable for retail investors for access 
to these premium services are being considered. In addition, the MSRB, 
the Commission, NASD and the North American Securities Administrators 
Association (``NASAA'') all provide general information about investing 
in 529 college savings plans useful to individual investors and market 
participants.\25\ NASD plans to introduce on its Web site in the near 
future an improved expense analyzer for the 529 college savings plan 
market using a live datafeed that should allow for more reliable 
calculations and cost comparisons among different 529 college savings 
plans. The CSPN utility is expected to serve as a central hub through 
which investors can easily access many of these other Web-based 
resources.
---------------------------------------------------------------------------

    \25\ The MSRB provides information for investors in 529 college 
savings plans at http://www.msrb.org/msrb1/mfs/ruleinfo.asp. The Commission 

also has published an investor-oriented introduction to 529 college 
savings plans at http://www.sec.gov/investor/pubs/intro529.htm. NASD has 

created a college savings center for investors at http://apps.nasd.com/investor_Information/Smart/529/000100.asp.
 NASAA, an 

association of state securities regulators, has published (in 
conjunction with CSPN and ICI) a brochure on understanding college 
savings plans, available at http://www.nasaa.org/Investor_Education/3136.cfm
.

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

    The MSRB believes that improved disclosures can only be effective 
if potential investors actually access such disclosures with sufficient 
time to make use of the information in coming to an investment 
decision. The MSRB urges dealers and other participants in the 529 
college savings plan market to provide the investing public with easy 
access to, and to affirmatively encourage the use of, this market-wide 
information. The MSRB will monitor the 529 college savings plan market 
closely with respect to the concerns it sought to address through the 
2005 Proposal. The MSRB will be acutely sensitive to, and will consider 
whether further rulemaking would be appropriate in the event of, any 
significant failures in the further development of the disclosure 
dissemination system or in the efficacy of this dissemination system to 
address the MSRB's stated investor protection concerns.

Time-of-Trade Disclosure Obligation in Connection With Out-of-State 
Sales.

    Summary. Currently, a dealer's time-of-trade disclosure obligation 
under Rule G-17 requires the dealer, when selling an out-of-state 529 
college savings plan interest to a customer, to disclose 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 529 college savings plan offered by 
the customer's home state.\26\ The 2004 Proposal sought to broaden this 
time-of-trade disclosure obligation to include reference to other 
potential benefits (such as scholarships to in-state colleges, matching 
grants into 529 college savings plan accounts, or reduced or waived 
program fees, among other benefits), in addition to state tax benefits, 
offered solely in connection with in-state investments.\27\
---------------------------------------------------------------------------

    \26\ The 2002 Notice also stated that such disclosure, coupled 
with a suggestion that the customer consult a tax adviser about any 
state tax consequences of the investment, would provide adequate 
notice of the potential loss of in-state tax benefits.
    \27\ The 2004 Proposal would require the dealer to suggest that 
the customer consult with a qualified adviser or contact his or her 
home state's 529 college savings plan to learn more about any state 
tax or other benefits that might be available in conjunction with an 
investment in that state's 529 college savings plan.
---------------------------------------------------------------------------

    The 2005 Proposal retained the baseline time-of-trade disclosure 
proposed in the 2004 Proposal, with a modification to include reference 
to the designated beneficiary's home state in addition to that of the 
customer. The 2005 Proposal also would add to the baseline time-of-
trade disclosure a requirement that the dealer advise the customer that 
any state-based benefits offered with respect to a particular 529 
college savings plan should be considered as one of many appropriately 
weighted factors that should be considered by the customer in making 
his or her investment decision. The dealer also would be required to 
suggest that the customer consult with his or her financial, tax or 
other adviser to learn more about how such home state features 
(including any limitations) may apply to the customer's specific 
circumstances, and that the customer also may wish to contact his or 
her home state or any other 529 college savings plan to learn more 
about any state-based benefits (and any limitations thereto) that might 
be available in conjunction with an investment in that state's 529 
college savings plan.
    In a significant expansion from the 2004 Proposal, the 2005 
Proposal sought to impose the special home state disclosure proposal in 
addition to the baseline time-of-trade disclosure described above. 
Under this special home state disclosure proposal, a dealer would be 
required to inquire of any out-of-state customer as to whether the 
realization of state-based benefits was an important factor in the 
customer's investment decision. If the customer were to answer 
affirmatively, the dealer would be required to disclose (i) material 
information available from established industry sources about state-
based benefits offered by the home state of the customer or designated 
beneficiary for investing in its 529 college savings plan and (ii) 
whether such state-based benefits are available in the case of an 
investment in an out-of-state 529 college savings plan.
    Finally, the 2005 Proposal reminded dealers that the time-of-trade 
disclosure obligation with respect to sales of out-of-state 529 college 
savings plan interests is in addition to dealers' existing general 
obligation under Rule G-17 to disclose to their customers at the time 
of trade all material facts known by dealers about the 529 college 
savings plan interests they are selling to the customers, as well as 
material facts about such 529 college savings plan that are reasonably 
accessible to the market through established industry sources. Further, 
the 2005 Proposal reminded dealers that disclosures made to customers 
as required under MSRB rules do not relieve dealers of their 
suitability obligations--including the obligation to consider the 
customer's financial status, tax status and investment objectives--if 
they have recommended investments in 529 college savings plans.
    Comments. All commentators on the 2004 Proposal supported the 
importance of ensuring disclosure to customers of the potential 
existence of state-specific features of 529 college savings plans, with 
many providing suggested modifications. CSF expressed concern about the 
potential for over-emphasizing state variations in a way that may

[[Page 25872]]

detract from more fundamental considerations in making an investment 
decision. Two commentators stated that not every difference in state 
treatment ultimately will be a benefit to the investor, particularly in 
view of potential recapture of state tax benefits or other restrictions 
that some states impose under certain circumstances.\28\ These 
commentators suggested that the best course would be to remind 
investors to carefully review the program disclosure documents of their 
home state programs and to consult their own advisors before investing, 
with one commentator stating that it would be inappropriate to suggest 
to investors that they seek help from their home state programs because 
it is unclear whether the programs can provide complete information 
regarding such consequences and because some states may seek to 
persuade investors to make an investment in their program rather than 
to impart disinterested information.\29\ Two other commentators stated 
that the proposed disclosure should reflect that some benefits may be 
dependent on the designated beneficiary's home state (rather than or in 
addition to the home state of the investor).\30\
---------------------------------------------------------------------------

    \28\ CSF and SIA.
    \29\ CSF. However, Hawkins disagreed, stating that with respect 
to non-tax state benefits, customers should be directed to the 
specific state program for more information.
    \30\ CSPN and FAME.
---------------------------------------------------------------------------

    Most commentators on the 2005 Proposal accepted the modified 
baseline time-of-trade disclosure. However, most commentators strongly 
opposed the newly proposed special home state disclosure proposal 
requiring disclosure of specific in-state features that an out-of-state 
investor may forego,\31\ with no commentator expressing support for 
this proposal. Several commentators argued that the specific 
disclosures under the special home state disclosure proposal would 
inevitably result in state-based benefits being given disproportionate 
weight as compared to the many other important factors to be considered 
in making an investment decision.\32\ In addition, commentators 
observed that, without a reliable source of market-wide information, 
dealers would be required to undertake substantial effort (with 
concomitant expenditure of resources) to understand and track the 
details of constantly changing state law treatment of all 529 college 
savings plans.\33\ Two commentators warned that requiring dealers to 
make specific disclosures about 529 college savings plans they do not 
offer could result in potential liability.\34\ SIA stated that the 
special home state disclosure proposal would have the counter-intuitive 
result of compromising a dealer's ability to develop in-depth expertise 
regarding the range of investment products it is reasonably capable of 
servicing. Wachovia expressed concern that this requirement would have 
the potential to paralyze investors with an overabundance of 
information.
---------------------------------------------------------------------------

    \31\ AG Edwards, CSF, CSP-Maryland, CSPN, Georgia, ICI, Iowa, 
Ohio TTA, SIA, T. Rowe, University of Alaska, USAA, Vanguard, 
Virginia CSP, Wachovia and West Virginia.
    \32\ AG Edwards, CSF, ICI and Vanguard.
    \33\ Hancock, ICI, SIA, T. Rowe, USAA, Vanguard and Wachovia.
    \34\ Hancock and ICI.
---------------------------------------------------------------------------

    The University of Alaska stated that it did not wish to have its 
program features explained by dealers who are not authorized to market 
its 529 college savings plan, with other commentators echoing the 
concern that dealers would often be required to disclose information 
about a security they do not offer and about which they may not have 
sufficient expertise.\35\ CSF observed that the burden this requirement 
would place on the 529 college savings plan market does not exist for 
any other type of security. Two commentators suggested that the MSRB 
await final action by the Commission on its point-of-sale disclosure 
proposal before finalizing any significant changes in 529 college 
savings plan disclosure requirements.\36\
---------------------------------------------------------------------------

    \35\ ICI and Vanguard.
    \36\ USAA and Wachovia.
---------------------------------------------------------------------------

    MSRB Response. The MSRB continues to believe that it is important 
that investors are informed that they may be foregoing state tax and 
other benefits offered by their home states by investing in out-of-
state 529 college savings plans. At the same time, the MSRB agrees that 
there is a potential for over-emphasizing the importance of a 
particular state's beneficial state tax treatment of an investment in 
its 529 college savings plan, such as where a state offers a tax 
benefit that ultimately is relatively small in value compared to the 
financial impact that a marginally higher expense figure may have or 
under a variety of other circumstances. As a result, the MSRB has 
adopted the revised out-of-state disclosure obligation, which retains 
the baseline time-of-trade disclosure as modified in the 2005 Proposal. 
The MSRB believes that this time-of-trade disclosure in connection with 
out-of-state sales of 529 college savings plans, as embodied in the 
revised out-of-state disclosure obligation, achieves the appropriate 
balance between providing for the disclosure to customers of material 
information about the potential loss of state tax or other benefits 
relevant to their investment decision in 529 college savings plans 
without imposing a significant burden on dealers and other 529 college 
savings plan market participants that could possibly result in an over-
simplification of the complexity of state law factors or an over-
emphasis of state law factors as compared to other relevant investment 
factors. The MSRB has also retained the reminders in the 2005 Proposal 
to the effect that these disclosures do not obviate other disclosure 
requirements or suitability obligations arising as a result of a 
recommendation.
    The MSRB has determined not to retain the proposal to expand the 
time-of-trade disclosure obligation to include disclosures of specific 
state tax and other state-based features of the investor's home state 
as set out in the special home state disclosure proposal. The MSRB has 
based this determination in large measure on the potential adverse 
impact of this proposal and the significant steps currently in process 
toward improvements in the 529 college savings plan disclosure system.

Fulfilling the Revised Out-of-State Disclosure Obligation Through the 
Program Disclosure Document.

    Summary. The 2004 Proposal would have clarified that dealers could 
meet their baseline time-of-trade disclosure obligation with respect to 
potentially foregone in-state benefits through the issuer's program 
disclosure document so long as the program disclosure document is 
provided to the customer at or prior to the time of trade. The 2004 
Proposal also would have strengthened the minimum standards for 
prominence in the program disclosure document in order to meet the 
baseline time-of-trade disclosure obligation. Thus, to meet this 
obligation through the program disclosure document, the disclosure must 
appear in a manner that is reasonably likely to be noted by an 
investor. A presentation of this disclosure in the program disclosure 
document in close proximity and with equal prominence to the first 
presentation of information regarding other federal or state tax-
related consequences of investing in the 529 college savings plan, and 
in close proximity and with equal prominence to each other presentation 
of information regarding state tax-related consequences of investing in 
the 529 college savings plan, would be deemed to satisfy this 
requirement. The 2005 Proposal modified this presentation standard to 
provide for equal prominence with the principal (rather than first) 
presentation of substantive information regarding

[[Page 25873]]

other federal or state tax-related consequences of investing in the 529 
plan, and the inclusion of a reference to this disclosure (rather than 
restating such disclosure in full) in close proximity and with equal 
prominence to each other presentation of information regarding state 
tax-related consequences of investing in the 529 plan. Neither proposal 
required that such disclosure be made through the program disclosure 
document, noting that the MSRB does not have the authority to mandate 
the inclusion of any particular item of information in the issuer's 
disclosure document. Both proposals provided that dealers would be 
required to separately make such disclosure if the program disclosure 
document did not include the information in the manner prescribed.
    Comments. Two commentators expressed concern that the 2004 Proposal 
would effectively establish requirements for what information must be 
included in the program disclosure document.\37\ They noted that the 
MSRB does not have authority to directly impose such requirements. CSF 
stated that the MSRB should not establish specific requirements for how 
such disclosure should appear in the program disclosure document, while 
two other commentators suggested limiting some of the presentation 
requirements described in the 2004 Proposal.\38\ SIA stated that the 
requirement that the information appearing in the program disclosure 
document must appear in a manner ``reasonably likely to be noted by an 
investor'' would place dealers in the position to question the judgment 
of the state issuers and suggested that there should be a presumption 
that the placement and adequacy of the disclosure in the program 
disclosure document is reasonable.
---------------------------------------------------------------------------

    \37\ CSPN and FAME. These commentators, as well as Hawkins, 
noted that CSPN's DP-1 already contained language on this topic.
    \38\ Hawkins and ICI.
---------------------------------------------------------------------------

    CSPN also expressed concern with respect to the reformulation of 
this language in the 2005 Proposal, stating that dealers would have to 
determine whether the issuer has satisfactorily made such disclosures, 
potentially calling into question the issuer's determination to include 
or omit particular information.\39\ CSPN stated that this would create 
a constant second-guessing aspect as to the validity of offering 
materials created and distributed by state issuers. SIA stated that 
this provision would likely lead dealers to create their own disclosure 
documents for use in marketing 529 college savings plans, conflicting 
with most distribution agreements and program disclosure documents.
---------------------------------------------------------------------------

    \39\ CSP-Maryland, Georgia, Iowa, Ohio TTA, University of 
Alaska, Virginia CSP and West Virginia supported CSPN's position.
---------------------------------------------------------------------------

    MSRB Response. The MSRB reaffirms its view that it has no authority 
to mandate the inclusion of any particular items in the issuer's 
program disclosure document. As noted in both the 2004 and 2005 
Proposals, disclosure through the program disclosure document in the 
manner described by the MSRB is not the sole manner in which a dealer 
may fulfill the revised out-of-state disclosure obligation. Just as a 
dealer could meet this disclosure obligation through a separate 
communication, it stands to reason that a disclosure made through the 
program disclosure document in a manner that is reasonably likely to be 
noted by an investor could also be used by a dealer to fulfill this 
duty. Thus, the MSRB has provided in the proposed rule change that, if 
the issuer has not included the information in the program disclosure 
document in the manner described, inclusion in the program disclosure 
document in another manner may nonetheless fulfill the dealer's out-of-
state disclosure obligation so long as disclosure in such other manner 
is reasonably likely to be noted by an investor.\40\
---------------------------------------------------------------------------

    \40\ Some commentators stated that certain portions of the 2005 
Proposal might not be consistent with the notion that the issuer's 
program disclosure document serves as ``the fundamental, stand-alone 
disclosure'' for the offering of its securities. See, e.g., AG 
Edwards. The MSRB believes that dealers generally may view the 
issuer's program disclosure document as the definitive source from 
which to obtain information about the securities they are selling to 
their customers. The requirement that a dealer make the revised out-
of-state disclosure separately if such disclosure is not included in 
the program disclosure document in a manner reasonably likely to be 
noted by an investor is not intended to imply otherwise, consistent 
with prior Commission guidance regarding the obligations of 
underwriters and other dealers in connection with municipal issuers' 
disclosure materials under the federal securities laws. See Exchange 
Act Release No. 26100 (September 22, 1988), 53 FR 37778 (Section 
III--Municipal Underwriter Responsibilities), as modified by 
Exchange Act Release No. 26985 (June 28, 1989), 54 FR 28799 (Section 
III--Interpretation of Underwriter Responsibilities), and as 
reaffirmed by Exchange Act Release No. 33741 (March 9, 1994), 59 FR 
12748 (Section V--Interpretive Guidance with Respect to Obligations 
of Municipal Securities Dealers).
---------------------------------------------------------------------------

General Suitability Obligations

    Summary. The 2005 Proposal reaffirmed the guidance originally 
provided in the 2002 Notice regarding general suitability standards 
under Rule G-19 for recommended transactions in 529 college savings 
plans. The 2005 Proposal added reminders to dealers to the effect that 
their suitability obligation requires a meaningful analysis that 
establishes the reasonable grounds for believing that the 
recommendation is suitable and that they must have and enforce written 
supervisory procedures reasonably designed to ensure compliance with 
this obligation for every recommended transaction. The 2004 Proposal 
did not address suitability issues.
    Comments. No commentator opposed the 2005 Proposal's discussion of 
general suitability standards.
    MSRB Response. The MSRB has retained this discussion of general 
suitability standards.

Comparative Suitability Obligation for Out-of-State Sales

    Summary. The 2005 Proposal would require a dealer to undertake a 
comparative suitability analysis if the dealer has recommended an out-
of-state 529 college savings plan transaction to a customer who has 
indicated that one of his or her investment objectives is realization 
of state-based benefits, as contemplated under the special home state 
disclosure proposal. This would involve the consideration of the state-
based benefits available from the customer's home state 529 college 
savings plan in a comparative analysis with the out-of-state 529 
college savings plan being offered. Any such state-based benefits 
offered with respect to a particular 529 college savings plan would be 
considered as one of many appropriately weighted factors that have an 
ultimate bearing on the relative strengths of a particular investment, 
and the existence of state-based benefits would not create a 
presumption that investment in the home state 529 college savings plan 
is necessarily superior to an out-of-state 529 college savings plan. If 
a dealer were to conclude that an investment in the home state 529 
college savings plan would be superior to an investment in the offered 
out-of-state 529 college savings plan under every reasonable scenario, 
then the dealer would be obligated to inform the customer of this 
determination and would be permitted to effect a transaction in the 
offered out-of-state 529 college savings plan only if the customer has 
directed to do so after this suitability determination has been 
disclosed and if the out-of-state 529 college savings plan would, 
without regard to the comparative analysis with the home state 529 
college savings plan, be suitable for the customer under traditional 
suitability standards. The 2004 Proposal did not contain comparable 
language.
    Comments. Most commentators strongly opposed the comparative

[[Page 25874]]

suitability proposal,\41\ although two commentators conceded that, 
depending on the facts and circumstances, the availability of in-state 
benefits may be one of many appropriate factors to consider in making a 
suitability determination under traditional suitability standards.\42\ 
Three commentators stated that there has been no evidence of abuse in 
the offering of out-of-state 529 college savings plans to justify these 
new requirements, observing that no enforcement actions have been 
taken.\43\ Several commentators observed that federal securities 
regulation has never been premised on the concept that a dealer is 
obligated to determine the most suitable investment of a particular 
type for any customer and that the comparative suitability proposal is 
inconsistent with the application of the suitability rule to every 
other product sold by dealers.\44\ Two commentators stated that 
comparisons are highly disfavored by NASD rules.\45\ The University of 
Alaska noted that one result of a more stringent suitability obligation 
for recommendations of 529 college savings plan transactions might be 
that dealers would place their clients in other investment vehicles 
that do not carry such regulatory risk.
---------------------------------------------------------------------------

    \41\ AG Edwards, CSF, CSP-Maryland, CSPN, Fidelity, Georgia, 
Hancock, ICI, Iowa, NAST, Ohio TTA, PFPC, SIA, T. Rowe, University 
of Alaska, USAA, Virginia CSP, Wachovia and West Virginia. No 
commentator expressed support for the comparative suitability 
proposal.
    \42\ AG Edwards and Hancock.
    \43\ CSF, ICI and USAA. NASD subsequently announced on October 
26, 2005 that it had reached a settlement agreement with Ameriprise 
Financial Services, Inc., in connection with the failure of the firm 
to establish and maintain supervisory systems and procedures 
reasonably designed to achieve compliance with suitability 
obligations relating to recommended transactions in 529 college 
savings plans. See http://www.nasd.com/ web/idcplg?IdcService= SS--GET--

PAGE& ssDocName=NASDW--015319. This settlement agreement appears to 
have been the basis for concern expressed by Fidelity and PFPC that 
NASD may be incorporating the comparative suitability proposal into 
its enforcement posture prior to its final approval. The MSRB 
understands that NASD did not intend certain language included in 
the settlement agreement to imply that the comparative suitability 
proposal is currently in effect.
    \44\ CSF, Fidelity, Hancock, PFPC, SIA, University of Alaska and 
USAA.
    \45\ CSF and SIA.
---------------------------------------------------------------------------

    Many commentators viewed the comparative suitability proposal as 
effectively requiring dealers to become fully familiar with the terms 
of all 529 college savings plans before offering any particular 529 
college savings plan.\46\ These commentators argued that this 
extraordinary burden is unprecedented and is likely to significantly 
discourage the marketing of 529 college savings plans. NAST agreed, 
emphasizing that the comparative suitability proposal would have 
substantially increased the burden on the states themselves. Wachovia 
suggested that the MSRB undertake a cost-benefit analysis before 
adopting the comparative suitability proposal, while USAA stated that 
the incremental costs associated with meeting this standard would cause 
firms to reevaluate whether offering 529 college savings plans 
continues to make sense or to pass the incremental costs on to 
investors. AG Edwards argued that it is untenable to require a dealer 
to inform a client that one 529 college savings plan is unequivocally 
superior to another. Two other commentators stated that they are 
receiving anecdotal evidence that some selling dealers are withdrawing 
from the 529 college savings plan market in response to this proposal 
and to recent NASD enforcement activity.\47\ CSF noted that one 
potential result may be that some customers who are accustomed to 
relying on their financial advisors and who otherwise might invest in 
suitable 529 college savings plans may ultimately never make such an 
investment.
---------------------------------------------------------------------------

    \46\ CSPN (with the concurrence of CSP-Maryland, Georgia, Iowa, 
Ohio TTA, University of Alaska, Virginia CSP, West Virginia), 
Hancock, ICI, T. Rowe Price and Wachovia.
    \47\ Fidelity and PFPC. Concerns regarding the negative impact 
of the comparative suitability proposal have also been detailed in 
press reports. See Charles Paikert, ``MSRB to Decide on 
Controversial 529 Proposals,'' Investment News, February 13, 2006, 
at 2; Terry Savage, ``Political Issues Put the Hurt on College 
Savings,'' The Street, February 10, 2006, at http://www.thestreet.com/ 

funds/investing/10267688.html; Jilian Mincer, ``Sales of 529 College 
Savings Plans Fell in '05 Amid Scrutiny,'' Wall Street Journal, 
February 9, 2006, at D2; Jilian Mincer, ``Disclosure Proposals for 
529s Risk a Broker Backlash,'' Wall Street Journal, January 3, 2006, 
at D2; Lauren Barack, ``Will Reform Drive Brokers From 529 Sales?'' 
Registered Rep, November 1, 2005, at http://www.registeredrep.com/ mag/

finance--reform-- drive--brokers.
---------------------------------------------------------------------------

    SIA expressed concern that the comparison contemplated by the 
proposal would be difficult to implement from a practical standpoint. 
ICI agreed, identifying a number of specific practical concerns. Some 
commentators stated that the comparative suitability proposal would 
place inordinate focus on state benefits while effectively ignoring the 
many other reasons why an investor might choose to invest in an out-of-
state 529 college savings plan.\48\ Other commentators predicted that 
the potential liabilities that would arise under the comparative 
suitability proposal would result in many dealers limiting their sales 
solely to the in-state 529 college savings plan, regardless of its 
advantage or disadvantage.\49\ CSF requested that the MSRB defer action 
on the comparative suitability proposal pending implementation of the 
planned CSPN Web site enhancement.
---------------------------------------------------------------------------

    \48\ ICI, Hancock and Wachovia.
    \49\ AG Edwards, Fidelity and PFPC.
---------------------------------------------------------------------------

    MSRB Response. The MSRB has determined not to retain the 
comparative suitability proposal, based in large measure on the 
potential adverse impact of this proposal and the significant steps 
currently in process toward dramatic improvements in the 529 college 
savings plan disclosure system. However, the MSRB agrees with those 
commentators that noted that the availability of in-state benefits may 
be one of many appropriate factors to consider in making a suitability 
determination under traditional suitability standards, depending on all 
the facts and circumstances. Thus, the MSRB has added guidance to this 
effect in the proposed rule change, in conjunction with additional 
guidance to the effect that dealers should consider whether a 
recommendation is consistent with the customer's tax status and any 
customer investment objectives materially related to federal or state 
tax consequences of an investment.

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

    The MSRB proposes an effective date for the proposed rule change of 
60 calendar days after Commission approval. 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

[[Page 25875]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2006-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-MSRB-2006-03. 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-2006-03 and should be submitted on or before May 23, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\50\
---------------------------------------------------------------------------

    \50\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-6555 Filed 5-1-06; 8:45 am]

BILLING CODE 8010-01-P