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What are Section 529 College Savings Plans?
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What rules govern the purchase and sale of 529 College Savings Plans?
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What are Municipal Fund Securities?
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Are firms that sell Municipal Fund Securities subject to the rules of the MSRB?
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What are the professional qualification requirements for representatives selling Municipal Fund Securities to investors?
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What are the professional qualification requirements for principals supervising Municipal Fund Securities transactions?
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Is the Series 51 Examination available and what do I need to do to take it?
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Do firms whose only municipal securities business is limited to the sale of municipal fund securities need to comply with SEC Rule 17f-2, the fingerprinting rule?
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Should a firm selling Municipal Fund Securities review its Form BD and FOCUS filing?
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Does selling these 529 Plans require firms to become members of SIPC?
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What does SIPC membership mean to the members?
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Does a firm that sells mutual funds and wants to offer Section 529 Plans to its customers need to go through FINRA's membership process to get approval to add this product?
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Would adding Section 529 Plans to a firm's existing business line ever require prior approval by FINRA?
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What is MSRB Rule G-37?
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My firm's only municipal securities activity is selling Section 529 Plans. Do the MSRB Rules on political contributions apply to firms selling municipal fund securities or Section 529 Plans?
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Am I prohibited from selling 529 Plans if my firm or its associated persons make certain political contributions?
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What is the difference between a selling dealer and a primary distributor?
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What are the reporting requirements of MSRB Rule G-37?
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Are there any exceptions to the quarterly form filing requirements?
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Are Municipal Fund Securities subject to the requirements of SEC Rule 15c2-12 (municipal securities disclosure)?
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Are Municipal Fund Securities subject to the requirements of MSRB Rules G-36 (official statements) and G-32 (disclosures in connection with new issues)?
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What are Section 529 College Savings Plans?
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Section 529 College Savings Plans are higher education savings plan trusts established under Section 529(b) of the Internal Revenue Code as "qualified tuition programs." Through these plans, individuals may make investments for the purpose of accumulating savings for qualifying higher education costs of beneficiaries. The plans include interests in pooled investment funds under trusts established by states or local governmental entities, as well as higher education savings plan trusts established by states. The plans have investment features similar to mutual funds or variable annuities.
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What rules govern the purchase and sale of 529 College Savings Plans?
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The Securities and Exchange Commission (SEC) Division of Market Regulation has stated that certain Section 529 College Savings Plans established by states or local governmental entities are municipal fund securities.1 Accordingly, the purchase and sale of state-sponsored Section 529 Plans are governed by the rules of the Municipal Securities Rulemaking Board (MSRB).
1
See letter dated February 26, 1999 from Catherine McGuire, Chief Counsel, Division of Market Regulation, SEC, to Diane G. Klinke, General Counsel, MSRB.
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What are Municipal Fund Securities?
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MSRB Rule D-12
defines a Municipal Fund Security 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. In other words, a Municipal Fund Security 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.
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Are firms that sell Municipal Fund Securities subject to the rules of the MSRB?
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Yes. The MSRB rules apply to firms selling these municipal products. Among other things, firms are required to comply with MSRB Rules A-12
and A-14
by notifying the MSRB of their activities and paying the appropriate fees, which include an initial fee and annual fees.
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What are the professional qualification requirements for representatives selling Municipal Fund Securities to investors?
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MSRB Rule G-3 has been amended to provide that an investment company/variable contracts limited representative (Series 6) satisfies the MSRB qualification standard for sales of Municipal Fund Securities. If, however, a representative sells both Municipal Fund Securities and other types of municipal securities, he/she must qualify as a municipal securities representative (Series 52) or a general securities representative (Series 7).
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What are the professional qualification requirements for principals supervising Municipal Fund Securities transactions?
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MSRB Rule G-3
generally requires that all municipal securities transactions be supervised by a municipal securities principal (Series 53). MSRB Rule G-3 has been amended to include a transition provision providing that, until March 31, 2003, if a firm’s municipal securities activities are limited exclusively
to municipal fund securities, 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. Effective April 1, 2003, all municipal fund securities principals will need to be qualified by taking and passing either the general municipal securities principal qualification examination (Series 53) or
the municipal fund securities limited principal qualification examination (Series 51), if the firm’s only municipal securities business is the sale of municipal fund securities. Municipal securities sales principals (Series 9/10)
may supervise sales to and purchases from customers of municipal fund securities. A municipal securities sales principal cannot be counted toward a broker-dealer's numerical requirements for municipal securities/municipal fund securities limited principals--a firm must also have at least one Series 53 or Series 51 (depending on the firm's size and types of business) in addition to the Series 9/10.
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Is the Series 51 Examination available and what do I need to do to take it?
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Series 51 is currently available and must be taken before April 1, 2003. Information about the exam is available at http://ww1.msrb.org/msrb1/archive/series51notice1202.htm
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Do firms whose only municipal securities business is limited to the sale of municipal fund securities need to comply with SEC Rule 17f-2, the fingerprinting rule?
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Yes. Rule 17f-2 requires, among other things, that broker-dealers require each of their "partners, directors, officers, and employees" to be fingerprinted. The rule exempts from the fingerprinting requirements broker-dealers that are “engaged exclusively in the sale of shares of registered open-end management investment companies, variable contracts, or interests in limited partnerships, unit investment trusts or real estate investment trusts” 17f-2(a)(1)(iii)(A). However, municipal fund securities are municipal securities, and the rule does not provide an exemption for such securities.
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Should a firm selling Municipal Fund Securities review its Form BD and FOCUS filing?
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Yes. Members may need to amend Item 12 of their Form BD, to indicate that they are a municipal securities dealer or broker. Also, when preparing their FOCUS reports, firms may need to report income from Municipal Find Securities as income from municipal securities transactions in Schedule I.
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Does selling these 529 Plans require firms to become members of SIPC?
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Yes. Unlike members that exclusively sell registered mutual funds, which are exempt from SIPC membership, a member selling 529 Plans must become a member of SIPC.2
2 Section 3(a)(2)(A) of the Securities Investor Protection Act of 1970.
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What does SIPC membership mean to the members?
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SIPC membership means several things. First, to become a SIPC member, firms must pay SIPC a $150 annual fee. Second, SIPC membership means that firms must comply with NASD Rule 3020 and maintain a blanket fidelity bond to provide for coverage against loss. In addition, MSRB Rule G-6 also requires brokers, dealers, and municipal securities dealers to comply with the fidelity bonding requirements of FINRA in order to meet the MSRB's qualification requirements.
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Does a firm that sells mutual funds and wants to offer Section 529 Plans to its customers need to go through FINRA's membership process to get approval to add this product?
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Probably not. Adding Section 529 Plans to a firm's product line will not constitute a material change in business requiring the filing of an application under NASD Rule 1017. If, however, a firm has a restriction in its membership agreement that specifically limits the firm's expansion beyond the product lines approved in the original membership application or otherwise prohibits the firm from engaging in this activity, then the firm would have to file a Rule 1017 application to get approval to lift the restriction.
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Would adding Section 529 Plans to a firm's existing business line ever require prior approval by FINRA?
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The NASD rules provide that members must obtain prior approval before effecting a "material change" in business. Whether any particular contemplated change in business is "material" depends on an assessment of all relevant facts and circumstances. The following factors are particularly relevant to the firm's analysis: (1) the effect the change is likely to have on the firm's capital; (2) the relationship, if any between the proposed new business activity and the firm's existing business; (3) the degree to which the firm's financial, operational, supervisory and compliance systems can accommodate the proposed expansion; and (4) the qualifications and experience of the firm's personnel. For example, as we mentioned in the previous question, if a firm that has never done any municipal fund business before starts selling 529 Plans, then it probably would not need to obtain prior approval. However, if the firm later decides to expand its municipal securities business beyond the 529 Plan business, then that expansion might constitute a material change that would require prior approval under NASD Rule 1017. Similarly, if the firm's 529 business came to constitute an overwhelming percentage of the firm's business, that change also might constitute a material change warranting an application.
Members may contact their local District Office to obtain the staff's guidance on this issue. For more information, consult Notice to Members 00-73.
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What is MSRB Rule G-37?
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MSRB Rule G-37
attempts to sever any connection between the making of political contributions and the awarding of municipal securities business. Generally, MSRB Rule G-37 prohibits brokers, dealers and municipal securities dealers from engaging in "municipal securities business" with issuers (as defined in the rule) when certain political contributions have been made to officials of such issuers. Further, MSRB Rule G-37 requires brokers, dealers and municipal securities dealers to disclose certain political contributions, as well as other information, by filing quarterly reports with the MSRB.
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My firm's only municipal securities activity is selling Section 529 Plans. Do the MSRB Rules on political contributions apply to firms selling municipal fund securities or Section 529 Plans?
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Yes. Firms that are engaged in municipal securities transactions, including selling 529 Plans that are issued by local and state governmental entities, need to comply with the requirements related to political contributions, including:
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recordkeeping
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reporting
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supervision
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Am I prohibited from selling 529 Plans if my firm or its associated persons make certain political contributions?
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It depends on the specific facts and circumstances. In general, if a firm is involved in negotiated underwriting or financial advisory work for a municipal issuer and certain political contributions have been made to officials of that issuer, then the firm would be prohibited from such activity with this issuer for two years. Therefore, if certain political contributions have been made to an issuer official for a 529 Plan, your firm may be precluded from serving as a primary distributor of that 529 Plan. However, you may be able to continue selling the 529 Plan if your sales activities are limited solely in the capacity of a selling dealer rather than as a primary distributor.
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What is the difference between a selling dealer and a primary distributor?
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These terms are not defined in the MSRB Rules. Because of the nature of 529 Plans, all firms that sell them are acting as dealers. However, not all dealers have a relationship with the issuer. Usually, one dealer will have the relationship with the issuer, and that dealer will be the primary distributor. That dealer will allow other firms to sell the Plan. These firms will be the selling dealers.
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What are the reporting requirements of MSRB Rule G-37?
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Firms engaged in a municipal securities activity of any kind must file quarterly reports with the MSRB on Form G-37
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Are there any exceptions to the quarterly form filing requirements?
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Yes. Brokers, dealers and municipal securities dealers do not need to file a quarterly report with the MSRB if there is no information to report. Also, a firm that serves solely as a selling dealer and does not serve as a primary distributor for a Section 529 Plan may qualify to exclude itself from the requirements of MSRB Rule G-37 - including the reporting requirements - by electing to make a one-time filing of Form G-37x if it can make the certifications set forth on the form.
You should contact the MSRB if you have any questions about whether your firm should file Form G-37 or G-37x.
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Are Municipal Fund Securities subject to the requirements of SEC Rule 15c2-12 (municipal securities disclosure)?
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Yes. Municipal Fund Securities are subject to SEC Rule 15c2-12
. The SEC Division of Market Regulation has stated that Municipal Fund Securities are subject to the requirements of Rule 15c2-12 because the interests in local government pools or higher education trusts, which comprise the fund securities generally, are offered only by direct purchase from the issuer and are therefore "primary offerings" as defined in that rule.
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Are Municipal Fund Securities subject to the requirements of MSRB Rules G-36 (official statements) and G-32 (disclosures in connection with new issues)?
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Yes. Consistent with the opinion of SEC Division of Market Regulation, the MSRB has stated that dealers acting as underwriters in primary offerings of Municipal Fund Securities generally would be subject to the requirements of G-36 unless such primary offering falls within one of the exemptions stated in Rule 15c2-12.
For the purposes of Rule G-32, Municipal Fund Securities sold in a primary offering are considered new issue municipal securities, as long as the underwriting period continues. A dealer effecting transactions in Municipal Fund Securities that are sold during a continuous underwriting period would be required to deliver to the customer the official statement by settlement of each such transaction. If the customer is a repeat purchaser of the securities, no new delivery of the official statement would be required, as long as the customer already received the official statement in connection with a previous purchase and the official statement has not been amended since the customer received it.
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