PHOENIX - The Securities and Exchange Commission has approved Municipal Securities Rulemaking Board rule changes governing municipal fund security advertisements to reflect investor protections and reforms implemented following the financial crisis.

The MSRB announced on Monday that it had received SEC approval for proposed amendments to the board’s Rule G 21(e) on municipal fund security product advertisements by municipal securities dealers. The amendments, originally introduced in February as part of a broader request for comments, will be effective Nov. 18 and will make several changes designed to provide investors more information.

“These changes ensure investors are alerted to the potential risks of investing in particular investment options of municipal fund securities,” said MSRB executive director Lynnette Kelly.

MSRB president and chief executive officer Lynnette Kelly.
MSRB president and chief executive officer Lynnette Kelly.

Municipal fund securities include 529 college savings plans and local government investment pools. The college savings plans are established by states under Section 529 of the Internal Revenue Code and allow parents to save for the college expenses of their children or other beneficiaries. Their investment earnings are tax free as long as they are used to pay for higher education expenses. LGIPs are investment pools established by state and local governments in which local jurisdictions pool and invest their cash according to certain stated objectives. Both types of investments have some of the characteristics of money market funds.

The amendments will make several changes designed to provide investors with more information. The changes represent a very small part of the MSRB's advertising rules.

The rule changes were designed in part to reflect regulatory developments, including the SEC's money market reforms and the formation of the Financial Industry Regulatory Authority. The money market reforms were put in place after the financial crisis in 2008 when many money market funds experienced high redemption rates that caused them to “break the buck” and fall below the threshold of $1.00 per share. The SEC reforms sought to make money market funds more resilient.

The rule currently requires that a municipal fund security advertisement of an investment option that the issuer holds out as having the characteristics of a money market fund include certain disclosures. The amendments will require enhanced disclosure about the risks associated with that investment option, and also alert investors that underlying mutual funds may impose liquidity fees or suspend redemptions.

The amendments will also enhance the out-of-state disclosure requirements in the existing rule. The rule currently requires certain advertisements for a 529 college savings plan to provide disclosure that an investor should consider, before investing, whether the investor’s home state offers any state tax or other benefits that are only available for investment in that state’s 529 college savings plan. Going forward, the rule will require disclosure that those other state benefits may include financial aid, scholarship funds, and protection from creditors.

The rule changes also will make performance data easier for investors to understand, such as making clear that an advertisement may provide a hyperlink to the website where the investor may obtain the most recent available data for an investment product.

The MSRB said it is continuing to evaluate the other comments it received following that February request for market comments, such as those on a draft new rule G-40 governing municipal advisor advertising.

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