After initially putting the brakes on the MSRB’s attempt to use underwriters of Section 529 college savings plans as its data-gathering team, the SEC has pressed the accelerator and approved an amended MSRB Rule G-45  requiring such underwriters to submit periodic electronic reports to the MSRB providing specified data regarding the applicable Section 529 plan.

The final rule requires semi-annual reporting on new Form G-45 regarding the plan’s assets, asset allocations for each plan investment option, plan contributions, plan withdrawals, plan fees and costs and certain other information, and annual reporting on such form of performance data for each plan investment option.  The “accelerated” rule will become effective on February 24, 2015, with the first semi-annual report due by August 30, 2015.

Much of the data to be submitted under Rule G-45 is already available in the periodically updated offering documents from Section 529 plans, on the issuer’s or program manager’s websites and/or on the College Savings Plan Network’s website, albeit not for consistent periods across Section 529 plans as Rule G-45 requires.  Other required data, such as aggregate contribution and withdrawal levels, is not generally available from plan disclosure.

By approving the new rule, the SEC has endorsed the MSRB’s use of its jurisdiction over brokers of municipal securities to obtain information about municipal fund securities that it lacks statutory authority to obtain directly from the municipal issuers of such securities, just as the SEC, in promulgating SEC Rule 15c2-12, leveraged its authority over brokers to  prompt enhanced initial and continuing disclosure by municipal bond issuers.

Unlike information required under SEC Rule 15c2-12, the Section 529 plan data to be submitted by underwriters to the MSRB will not be disclosed to Section 529 plan investors, at least initially, but rather used by the MSRB to monitor Section 529 plans and evaluate the need for and type of further regulation affecting that niche of municipal securities.  The MSRB has telegraphed, however, that at a future date it may engage in further rulemaking to share its trove of Section 529 plan-related information with investors.  And having established the precedent of requiring Section 529 plan underwriters to serve as data conduits for plans they distribute, the MSRB may also over time expand the categories of such data from those specified in the freshly minted Rule G-45, as the SEC has done with its Rule 15c2-12.

The procedural history of the MSRB’s new rule is peculiar.  The proposed rule was filed by the MSRB with the SEC on June 10, 2013.  Following a comment period, on September 26, 2013 the SEC took the unusual step of instituting proceedings to determine whether it should disapprove the proposed rule, suggesting, among other reasons, that substantial questions had been raised about the cost-benefit aspects of the proposed regulation.  The MSRB then filed a response to the comments submitted on the proposed rule, as well as an amended version of the proposed rule with some clarifications.  On February 21, 2014, the SEC approved the amended rule on an accelerated basis, stating that the MSRB’s response and rule clarifications had satisfied the SEC on the concerns raised by commenters.  The SEC invited further comment on the amended rule, even though the rule is now approved.  The MSRB, in a February 24, 2014 notice, stated that the rule would become effective on February 24, 2015.   The SEC’s initial lack of support for the MSRB’s proposal, and its subsequent accelerated approval of the slightly revised proposal, has generated a modicum of regulatory whiplash among followers of the rule’s progress.

In addition to jurisdictional and cost-benefit objections, comments on the proposed rule focused on its definition of “underwriter” and on an underwriter’s access to the data the rule requires underwriters to submit.  Most Section 529 plans involve retention by the governmental issuer/plan sponsor of a broker-dealer to distribute the plan securities, with other non-broker-dealer entities providing investment advice, recordkeeping and administrative services.  The entities providing the non-distribution services may or may not be affiliated with the broker-dealer and may provide such services pursuant to a contract with the plan sponsor or pursuant to a subcontract with the broker-dealer.   The MSRB’s rulemaking notice included language suggesting that the plan sponsor and other entities that are not registered broker-dealers might, under certain circumstances, be deemed “underwriters” subject to the Rule.  Commenters protested that the MSRB can only regulate broker-dealers.

The MSRB’s letter accompanying its amended version of Rule G-45 retracted the suggestion that the governmental issue/plan sponsor might be an “underwriter” but, as to other entities involved in Section 529 plan program management, doubled down on the proposition that, depending on the facts and circumstances, entities that are not registered brokers might, in performing services as a Section 529 plan contractor or subcontractor, perform functions that are “broker” functions and therefore “underwriter” functions.   The SEC approved the MSRB’s slightly revised position on “underwriter” status.

Commenters also raised concerns about Rule G-45’s apparent assumption that a Section 529 plan’s underwriter has access to and the right to provide to the MSRB plan data that may be maintained on behalf of the plans by affiliated or unaffiliated entities with which the underwriter may or may not have contractual privity.  (Unlike SEC Rule 15c2-12, which requires underwriters to enter into contracts with governmental issuers under which issuers agrees to provide the specified disclosure items, Rule G-45 directly requires Section  529 plan underwriters to provide the specified data to the MSRB.)   The MSRB and SEC have indicated that Rule G-45 requires an underwriter “to submit only information it possesses or has a legal right to obtain.”  The SEC’s rule approval noted that “the MSRB [has] stated its belief that an underwriter has a legal right to obtain all information that is related to its activities in connection with the underwriting, even when it has designated an affiliate or contractor to perform such activities.”

As to concerns that confidentiality or other constraints on the underwriter’s obtaining or sharing of plan-related information should be taken into account, the SEC endorsed the MSRB’s statement that “the legal right to obtain information for purposes of Rule G-45 is not affected by a ‘voluntary relinquishment, by contract or otherwise, of such a right.’’”

To the extent the MSRB continues to use its authority over broker-dealers as a point of access to Section 529 plan data it seeks or wants disclosed to investors, further skirmishing over  the MSRB’s view of information that a Section 529 plan underwriter “has a legal right to obtain” may lie ahead.