Stakeholders responding to a Municipal Securities Rulemaking Board request for comment were broadly supportive of an option designed to modernize delivery of municipal fund securities disclosure documents, but their responses revealed divisions over whether this distinct category of munis needs its own time of trade disclosure rule.
The concept release asked for input on potentially modernizing the delivery method for disclosure documents in connection with primary offerings of municipal fund securities under MSRB Rule G-32 and possibly establishing a new stand-alone rule addressing time of trade disclosure obligations relating to municipal fund securities similar to MSRB Rule G-47.
The Securities Industry and Financial Markets Association, a trade association that represents broker-dealers, strongly supports modernization of dealers' disclosure obligations with respect to municipal fund securities transactions, its letter said.
"SIFMA supports modernizing and streamlining the disclosure requirements for municipal fund securities to account for new technologies, changes in investor behaviors, and the characteristics that differentiate municipal fund securities from typical municipal debt securities," its letter said.
Examples of municipal fund securities include investments in certain 529 savings plans, ABLE programs for qualified disability expenses and local government investment pools, known as LGIPs for short, according to an MSRB concept release
Under Rule G-32, dealers selling municipal securities – including municipal fund securities – during the primary offering disclosure period must deliver the official statement to the customer no later than the transaction's settlement date, the concept release said.
Unlike municipal debt securities where the primary market disclosure period represents a limited time period, all sales of municipal fund securities are primary market transactions sold in continuous offerings, the concept release said. Consequently, the primary offering disclosure period under Rule G-32 only ends when an issuer stops issuing and selling any further municipal fund securities.
"Plan disclosure documents are often 100 pages or longer and therefore expensive to print and send," College Savings Plans Network Chair Mary Morris said in a comment letter on behalf of that organization, an affiliate of the National Association of State Treasurers.
CSPN's membership includes elected officials and senior staff in state government with oversight of 529 college savings plans. It's likely that dealers routinely waste paper and postage sending lengthy documents to customers who may not even want paper delivery, the letter said.
"Making paper delivery the opt-in choice would ensure that costs are only spent on those customers who still actively desire a paper delivery, rather than those who have not updated the preferences in their account but would be satisfied by e-delivery," CSPN's letter said.
The MSRB is exploring alternatives in an effort to both improve investors' access to information and lighten dealers' burden when it comes to complying with their obligations regarding delivery of disclosure documents for municipal fund securities, the concept release said.
The concept release put forth two alternative frameworks for potential amendments to Rule G-32, both of which would continue to require dealers to provide a paper copy of the official statement to a customer upon request.
The first alternative, the MSRB's "access equals delivery alternative" would extend the MSRB's current e-delivery standard that applies to municipal debt securities to municipal fund securities. It would allow dealers to notify customers of the availability of plan disclosure documents on the MSRB's Electronic Municipal Market Access website and how to access them instead of having to deliver a copy to their customers through physical or electronic delivery.
The second alternative, the "supplemental-layered disclosure alternative" could keep the physical delivery requirement for an initial sale to a municipal fund security customer, with a default to electronic access via EMMA for any supplements and amendments in relation to subsequent sales to the customer of such municipal fund security, unless the customer asks for physical delivery.
Among respondents expressing an opinion, the access equals delivery alternative was the clear winner.
"CSPN believes that a modified implementation of the access equals delivery alternative – one that requires notice of posting of plan disclosure documents on EMMA and on the 529 plan's public website – would best serve the needs of 529 plan account owners," Morris said in her letter.
Like Morris, ABLE Savings Plans Network Chair Bette Ann Mobley expressed support for a modified version of the access equals delivery alternative.
ASPN, also a NAST affiliate, believes that a modified implementation of the access equals delivery alternative that requires notice of posting of plan disclosure documents on EMMA as well as on the ABLE plan's public website would best serve the needs of ABLE plan account owners, many of whom are unfamiliar with the MSRB or EMMA.
"It would place an undue burden on them to require that they familiarize themselves with EMMA, a website that they would likely use only sporadically, if ever," Mobley said in her letter, adding that most ABLE plan account owners are quite familiar with their own ABLE plan's website, with a significant majority using those websites for day-to-day activities like making contributions, withdrawals and investment changes.
The Investment Company Institute also recommended that the MSRB pursue the access equals delivery alternative with a modification.
"We suggest also providing for the posting of plan disclosure documents on the 529 plan's public website," Tara Buckley, deputy general counsel, financial regulation, and Shannon Salinas, associate general counsel, retirement policy, at ICI said in their letter.
Similarly, CSPN, ASPN and ICI were all on the same page when it came to the topic of a potential stand-alone time of trade rule, with each saying they didn't believe one was necessary.
"ICI appreciates the MSRB's dedication to ensuring that its rules are clear," Buckley and Salinas said in their letter. "We do not, however, believe that dealers' current obligations with respect to municipal fund securities under Rule G-47 are unclear."
Dealers understand what information they are required to supply to investors in 529 plans and ABLE programs, ICI's letter said.
"Given this, we do not believe that a new stand-alone rule is necessary," the letter said.
In its concept release, the MSRB said it believes that a stand-alone time of trade rule for municipal fund securities would benefit investors and ensure that dealers have a sufficient understanding of their regulatory obligations.
SIFMA agrees, according to its letter, signed by Leslie Norwood, managing director and associate general counsel at SIFMA and Gerald O'Hara, vice president and assistant general counsel there. As the MSRB's concept release acknowledged, municipal fund securities are more akin to mutual funds and other pooled investments than bond debt issued by individual state or local governments, SIFMA's letter said.
"While investors in the debt of a single municipal issuer would want to know the most current material information about the financial well-being of that issuer at the time of trade, this type of information generally is not relevant to the pooled investments that constitute municipal fund securities," the letter said.
Municipal fund securities investors should receive time of trade disclosures that take into account the unique characteristics of those investments, "which likely would decrease the number of unnecessary or duplicative disclosures and lead to better investor understanding of the investments and importance of the relevant documents," SIFMA's letter said.
"MSRB is thrilled to have a healthy industry response that will better inform possible initiatives to modernize municipal fund securities disclosure obligations," Ernie Lanza, MSRB's chief regulatory and policy officer, said in an email.
Now that the comment period has concluded, "MSRB will thoroughly review the responses and, over the next couple of meetings, consider whether to formulate, for further industry comment, specific proposals to leverage the efficiencies and broader public reach of electronic disclosure for 529 savings plans, ABLE programs and other municipal fund securities," Lanza said.
