United States: MSRB Decides to Adopt Streamlined Customer Protection Obligations Relating to the Marketing of 529 Plans

On February 23, 2006, the Municipal Securities Rulemaking Board (the "MSRB") announced that it voted to adopt, with substantial revisions, the interpretive guidance on customer protection obligations relating to the marketing of 529 Plans proposed in Notice 2005-28.¹ The final guidance will not contain a comparative suitability obligation nor a requirement to disclose the salient features of the customer’s home state 529 Plan if it is not being offered to the customer. The language of the interpretive guidance is still being drafted and will likely be released within the next several weeks. The following is a summary of the key elements of the adopted interpretive guidance.

In Notice 2005-28, the MSRB proposed to require that a broker-dealer recommending out-of-state 529 Plans to a customer, who had indicated that the realization of state-based benefits was an important factor in his investment decision, conduct a comparative suitability analysis that compared the state-based benefits available from the customer’s home state 529 Plan against the features of the out-of-state 529 Plan being offered. The proposal generated significant concern among industry members due to the uncertainty and difficulty involved in conducting a comparative suitability analysis.

The MSRB eliminated the comparative suitability analysis requirement in the interpretive guidance. In addition, the guidance will note that no single factor is always more important than any other factor. However, the guidance will emphasize that providing the requisite disclosure does not satisfy broker-dealers’ suitability obligation and that broker-dealers must perform an active suitability analysis for each recommended customer transaction. It will be more important than ever for broker-dealers to be able to demonstrate the process utilized in making a suitability determination and be able to support the determination with appropriate documentation.

The MSRB has determined to require that a broker-dealer selling an out-of-state 529 Plan disclose, at or prior to the time of trade, that:

• Favorable state-based benefits may be available only if the customer invests in a 529 Plan offered by the customer or beneficiary’s home state;
• Any state-based benefits that are available are one of many appropriately weighted factors that should be considered by the customer in making his or her investment decision; and
• The customer should consult with a tax adviser regarding the purchase of the 529 Plan. Broker-dealers will also be encouraged to advise the customer to contact his or her home state to learn more about any state-based benefits that might be available.

In Notice 2005-28, the MSRB asserted that, in order to comply with their disclosure requirement, broker-dealers would have a duty to inquire whether the realization of state-based benefits was an important factor in a customer’s investment decision. If the customer replied affirmatively, the broker-dealer would have been required to disclose material information available from "established industry sources" about state-based benefits offered by the home state 529 Plan of the customer or designated beneficiary. This obligation would have created a considerable burden on broker-dealers selling out-of-state 529 Plans, as registered representatives and their supervisors would have been required to know the material features, benefits, costs and risks of multiple 529 Plans. The MSRB eliminated this obligation from the interpretive guidance.

The MSRB concluded in Notice 2005-28 that broker-dealers’ point-of-sale disclosure obligation could be satisfied if the information required to be disclosed appeared in the Official Statement, so long as the Official Statement was delivered to customers at or prior to the time of trade and the disclosure appeared in a manner that was reasonably likely to be noted. The MSRB decided to adopt this position and the final interpretive guidance will emphasize that the information must be prominently presented in order to satisfy the disclosure requirement.

In Notice 2005-28, the MSRB sought comment on the feasibility of creating one or more centralized websites that would provide summary information allowing customers and broker-dealers to make meaningful comparisons of the material features of 529 Plans. In adopting the interpretive guidance, the MSRB anticipates that the College Savings Plan Network’s website and other websites devoted to the 529 Plan market will be enhanced to collectively provide comprehensive, reliable, easy-to-use and accessible information at no cost. The MSRB will be closely monitoring the disclosure mechanisms available in the 529 Plan marketplace. It appears that if the industry rises to the challenge established by the MSRB, then no further regulatory action will be taken by the MSRB (barring unforeseen circumstances). However, if the disclosure mechanisms instituted by the industry do not allow for easy comparison of 529 Plans, then the MSRB will revisit the customer protection obligations relating to the marketing of 529 Plans and may reintroduce the provisions it eliminated in adopting the interpretive guidance.

© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.