ICI seeks changes to fair dealing guidance

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A group representing investment funds wants fair dealing rule guidance involving disclosures to be better tailored to 529 savings plans, contending that such plans are structured more like mutual funds than like bonds.

In a letter sent to the Securities and Exchange Commission this week, the Investment Company Institute, which represents regulated funds such as the mutual funds,recommended a few changes in the Municipal Securities Rulemaking Board’s Rule G-17 interpretive guidance. The group told the SECthat a 529 plan offering differs from bond offerings in their underwritings and that additional guidance is needed.

“This is necessary because, while a great deal of the MSRB’s proposal is applicable to all underwriters subject to the MSRB’s jurisdiction, this is not the case with many of the required disclosures, which do not appear applicable to or suitable for 529 plans due to the nature of their underwritings,” wrote Tamara Salmon, ICI associate general counsel.

The MSRB filed the G-17 guidance to the SEC at the beginning of August and the ICI sent their letter to the SEC on Aug. 26. The MSRB's proposal is largely aimed at streamlining and reducing the voluminous disclosures muni issuers receive from underwriters at the start of a deal. ICI said it supported the proposal overall, but wanted some additional language acknowledging the differences between 529 plans and traditional muni bonds.

In 2001, the SEC adopted the term “municipal fund security,” and in doing so recognized that 529 plan offerings were different from bond underwritings, Salmon wrote. The plans were established by states as a way to invest to pay for higher education. Most states and D.C. offer 529 plans.

A 529 plan is similar to a mutual fund in that it has a single underwriter, and offerings of municipal fund securities are continuous and not for a fixed amount as in a bond offering. Another difference between 529 plans and bonds is that pricing is based on the plan’s net asset value, not on what the underwriter believes to be a “fair and reasonable price,” Salmon wrote.

Disclosures prescribed in the guidance are irrelevant to 529 plans and would be confusing when it comes to underwriters' primary roles, their duty to purchase securities from the issuer at a fair and reasonable price and underwriter’s compensation, Salmon wrote.

ICI also wants to clarify that 529 plan underwriters are not required to disclose information that apply to an offering of bonds but would not be applicable involving a 529 plan or ABLE Act program. ABLE created tax-advantaged savings accounts for individuals with disabilities and their families.

For example, underwriters for 529 plans don’t purchase securities, so that disclosure would not be relevant to them, Salmon told The Bond Buyer.

With disclosures concerning the underwriter’s role, ICI recommends language be added stating that the underwriter will make the required disclosures "to the extent applicable to the nature of the relationship with the issuer.

“We believe adding this phrase to the disclosure section will provide 529 plan underwriters the flexibility they need to more accurately tailor their disclosure while ensuring that appropriate disclosures are provided to issuers,” Salmon wrote.

Regarding required disclosures to issuers in the MSRB’s guidance, ICI wants to change the language to “required disclosures relating to underwritings involving complex structures.”

“This revision should help underwriters, such as 529 plan underwriters, understand that they are not required to provide the ‘required disclosures’ if the offering does not involve complex financing structures,” Salmon wrote.

Last, ICI wants to clarify municipal fund securities in terms of fair pricing. Since 529 plan offerings are calculated based on net asset value, the group said it does not fit the model for the "fair and reasonable" pricing standard.

“These are very minor amendments that we’re seeking just to say you only have to provide the disclosure relevant to the type of product that you are offering,” Salmon said.

The MSRB said the rule would help the board better oversee the characteristics of the 529 plan market and determine if it needed to implement more safeguards for investors of those plans.

The MSRB first began collecting data about 529 plans in 2015 and began collecting data about ABLE programs in 2018.

In June, amendments to Rule G-45, on reporting of information on municipal fund securities, became effective that makes for more stringent ABLE and 529 plan requirements and create uniformity in how dealers report information about 529 plans and ABLE accounts.

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529 plans MSRB rules SEC regulations Municipal disclosure ICI MSRB SEC Washington DC