RCA - Fall 2001 - Municipal Fund Securities

Municipal Fund Securities,1 a.k.a. Section 529 College Savings Plans, have investment features similar to investment company securities or variable annuity contracts. NASD Regulation reminds firms that Municipal Fund Securities are municipal securities and, accordingly, firms selling these are subject to the rules of the Municipal Securities Rulemaking Board (MSRB). The application of MSRB rules to Municipal Fund Securities transactions may impact most of those firms that are not now registered with the SEC as municipal securities dealers, that have a limited number of representatives and principals, and whose business line predominately includes the sale of retail investment products.

In view of the unique characteristics of Municipal Fund Securities, the MSRB has adopted a series of amendments to its existing municipal securities rules. Included in these MSRB rule amendments are modifications to: transaction fee assessments (A-13); professional qualification (G-3); recordkeeping (G-8); transaction reporting (G-14); customer transaction confirmation requirements (G-15); customer account transfers (G-26); new issue disclosure (G-32); and CUSIP assignment requirements (G-34). All other MSRB rules apply to transactions in Municipal Fund Securities.

A significant MSRB rule modification involves the amended municipal securities professional qualification requirements for both representatives and principals when only effecting transactions in Municipal Fund Securities. MSRB Rule G-3 has been modified to provide that an investment company/variable contracts limited representative (Series 6) satisfies the MSRB qualification standard for sales of Municipal Fund Securities.2 The MSRB Rule G-3 requirement that municipal securities transactions be supervised by a qualified municipal securities principal has been amended to provide that, until July 31, 2002, if a firm’s municipal securities activities are limited exclusively to Municipal Fund Securities and the firm has fewer than 11 associated persons engaged in Municipal Fund Securities activities, the firm may fulfill its obligation to have a municipal securities principal by designating either an investment company/variable contracts limited principal (Series 26) or a general securities principal (Series 24) to act as a Municipal Fund Securities limited principal. Importantly, the MSRB is advising dealers that sell Municipal Fund Securities to take all steps necessary to ensure full compliance with the requirement to have a qualified municipal securities principal (Series 53) on or after August 1, 2002.

Complete information about the MSRB rule modifications relating to Municipal Fund Securities can be found on the MSRB Web Site. Questions about Municipal Fund Securities may be directed to Malcolm Northam, Member Regulation, NASD Regulation, at (202) 728-8085.


1 A Municipal Fund Security is defined in MSRB Rule D-12 as a municipal security issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940, would constitute an investment company within the meaning of Section 3 of the Investment Company Act. A Municipal Fund Security is, in essence, a municipal security that would qualify as a security of an investment company under the Investment Company Act if it had not been issued by a state or local governmental entity.

2 A representative who sells both Municipal Fund Securities and other types of municipal securities must qualify as a municipal securities representative by taking and passing either the municipal securities representative qualification examination (Series 52) or the general securities registered representative examination (Series 7).