THE FUNDAMENTALS OF GOOD

1

• THE FUNDAMENTALS OF GOOD
• DISCLOSURE FOR A 529 PLAN

NAST TREASURY MANAGEMENT CONFERENCE DECEMBER 6,
2004 Elizabeth L. Bordowitz, General Counsel
Finance Authority of Maine Kenneth B. Roberts,
Partner Hawkins Delafield Wood LLP
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Were here to talk about

• DI-S-C-L-O-S-U-R-E
• DISCLOSURE, DISCLOSURE, YEAH!

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What is Disclosure?

• The fundamental aim of the disclosure provisions
  in the 33 and 34 Acts is to secure to
  potential buyers the means of understanding the
  intricacies of the transaction into which they
  are invited H.R. Rep. No. 85, 73d Cong., 1st
  Sess. 8 (1933)

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OFFICIAL STATEMENT

• final official statement means a document or
  set of documents prepared by an issuer of
  municipal securities or its representatives
  that sets forth information concerning the terms
  of the proposed issue such issuers and
  entities, enterprises, funds, accounts, and
  other persons material to an evaluation of the
  Offering (1994)
• Those statements that may give rise to federal
  securities law liability (2004)

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ANTI FRAUD PROVISIONS

• The antifraud provisions of the Securities Act
  give some assurance that caution rather than
  recklessness will characterize the issuance of
  securities. In other words, the spectre of
  liability will have a tendency to make for
  conservatism in statements and representations
  (1933)

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• When a municipal issuer releases information to
  the public that is reasonably expected to reach
  investors and the trading markets, those
  disclosures are subject to the antifraud
  provisions. The fact that they are not published
  for purposes of informing the securities markets
  does not alter the mandate that they not violate
  antifraud proscriptions (1994)

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Who is Responsible for Disclosure?

• Issuers are primarily responsible for the
  content of their disclosure documents and may be
  held liable under the federal securities laws for
  misleading disclosure Because they are
  ultimately liable for the content of their
  disclosure, issuers should insist that any
  persons retained to assist in the preparation of
  their disclosure document have a professional
  understanding of the disclosure requirements
  under the federal securities laws (1989)

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Disclosure Standard

• Rule 10b-5
• unlawful for any person . . . to make any untrue
  statement of a material fact or to omit to state
  a material fact necessary in order to make the
  statements made, in the light of the
  circumstances under which they were made, not
  misleading . . . in connection with the purchase
  or sale of any security
• Material
• substantial likelihood that, under all the
  circumstances, the omitted fact would have
  assumed actual significance in the deliberations
  of the reasonable investor . . . put another
  way . . . that the disclosure of the omitted
  fact would have been viewed by the reasonable
  investor as having significantly altered the
  total mix of information made available (1994)

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Litigation

• SEC
• administrative
• civil
• criminal (referral to Department of Justice)
• Private Plaintiff

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Rights of Action

• Exchange Act Section 10(b) and Rule 10b-5 SEC
  enforcement and implied private right
• Securities Act Sections 11 and 12 express
  private rights, applicable to mutual funds but
  not to municipal securities
• Securities Act Section 17(a) SEC enforcement
• (a)(1) - scienter
• (a)(2) (a)(3) - negligence

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Rule 10b-5 SEC Action

• a materially misleading misstatement or omission
• made or omitted with scienter (fraudulent intent
  or recklessness)
• in connection with the purchase or sale of a
  security

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SEC Municipal Securities Enforcement Actions

• Orange County
• Maricopa County
• Syracuse
• City of Miami
• Massachusetts Turnpike

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Orange County

• SEC report addressed Board members individually
  enforcement actions addressed the Board as a
  Board, the Treasurer and Assistant Treasurer and
  the County and related entities.
• a public official may not authorize disclosure
  that the official knows to be false
• nor may a public official authorize disclosure
  while recklessly disregarding facts that indicate
  that there is a risk that the disclosure may be
  misleading
• What is acting recklessly?
• public official has knowledge of facts bringing
  into question the issuers ability to repay the
  securities
• fails to take steps appropriate under the
  circumstances to prevent the dissemination of
  materially false or misleading information
  regarding those facts

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Advice to Issuer Officials

• review the entire document
• ask for clarification as to treatment of facts
  known to be material that raise questions of
  accuracy or sufficiency
• seek information and ask questions of the
  officials, employees, professionals, advisors and
  third parties who supplied information to be
  included in the document
• ask follow up questions to determine the
  reasonableness of any assumptions or estimates
  and
• be prepared to defend disclosure practices as
  conforming to an appropriate standard of care

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Reliance on Professionals Defense

• make complete disclosure to the appropriate
  professional,
• request the professionals advice as to what
  disclosure is proper,
• receive advice regarding the appropriate
  disclosure, and
• rely in good faith on that advice

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Comparison of Mutual Fund and Municipal Bond
Disclosure

• Mutual Fund
• issuers and principal operating affiliates are
  regulated under federal securities law
• mutual funds are highly uniform in structure with
  controlled differences that lend themselves to
  easy comparison
• disclosure is comprehensively prescribed, and
  reviewed, by SEC regulation
• continuous offering
• little need to address external policies
• more institutional than 529 plans

• Municipal Bond
• issuers are States or entities regulated under
  state law
• issuers and issues are extremely diverse in
  factually complex ways
• disclosure is largely customary, guided by market
  practice, to some extent articulated by industry
  statements and developed by working groups
• discrete offering
• substantial need to address external policies
• more institutional than 529 plans

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SEC FORM N-1A

• CONTENTS OF FORM N-1A
• GENERAL INSTRUCTIONS Page
• No.
• A. Definitions
  5
• B. Filing and Use of Form N-1A
  . 5
• C. Preparation of the Registration
  Statement . 6
• D. Incorporation by Reference 8
• PART A INFORMATION REQUIRED IN A
  PROSPECTUS . 9
• Item 1. Front and Back Cover Pages
  . 9
• Item 2. Risk/Return Summary Investments, Risks,
  and Performance . 10
• Item 3. Risk/Return Summary Fee
  Table 13
• Item 4. Investment Objectives, Principal
  Investment Strategies, Related Risks, and
• Disclosure of Portfolio Holdings
  17
• Item 5. Management, Organization, and Capital
  Structure 17
• Item 6. Shareholder Information
  19
• Item 7. Distribution Arrangements
  21
• Item 8. Financial Highlights Information
  . 24

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PART B INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
.. 26 Item 9. Cover Page and Table of
Contents 26 Item 10. Fund
History ...........................
26 Item 11. Description of the Fund
and Its Investments and Risks
.26 Item 12. Management of the
Fund 28 Item 13.
Control Persons and Principal Holders of
Securities ..35 Item 14.
Investment Advisory and Other Services
36 Item 15. Brokerage Allocation and
Other Practices .. 39 Item 16.
Capital Stock and Other Securities
40 Item 17. Purchase, Redemption, and
Pricing of Shares 40 Item 18.
Taxation of the Fund
41 Item 19. Underwriters
41 Item 20. Calculation of
Performance Data 42 Item
21. Financial Statements
47  
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PART C OTHER INFORMATION
53 Item 22. Exhibits ..........................
..................................................
..................................................
............54 Item 23. Persons Controlled by or
Under Common Control with the Fund
55 Item 24. Indemnification
.55 Item 25. Business and
Other Connections of the Investment
Adviser 55 Item 26. Principal
Underwriters 55 Item
27. Location of Accounts and Records
.55 Item 28. Management Services
.................................................
..................................................
................55 Item 29. Undertakings
..56   SIGNATURES
.56
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COLLEGE SAVINGS PLANS NETWORK DISCLOSURE
PRINCIPLES

• intended to establish a reference for basic
  disclosure practices
• intended to improve comparability between Plans
• intended to improve comparability, where
  applicable, between Plans and direct investment
  in mutual funds
• not intended to be comprehensive
• not intended to be exclusive
• not intended to be final

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The Definition of Offering Materials

• all documents identified by the State Issuer as
  intended to provide substantive disclosure of the
  terms and conditions of an investment in its
  Section 529 Plan
• may include appendices and physically separate
  documents
• do not include marketing materials or
  advertisements that do not include substantive
  disclosure or that refer to the Offering
  Materials
• the Offering Materials should present information
  in a clear, concise and understandable manner

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Updating the Offering Materials

• by supplement or republication
• approximately annually to reflect the most recent
  annual performance data and other material
  changes in the information presented since the
  last Offering Materials were issued
• interim supplements to the Offering Materials as
  deemed necessary by the State Issuer in order to
  prevent the Offering Materials from containing an
  untrue statement of material fact or omitting to
  state a material fact necessary in order to make
  the statements made, in light of the
  circumstances under which they were made, not
  misleading
• supplements should be distributed to all existing
  account owners and should become part of the
  Offering Materials

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Offering Materials Should Include
Finance Authority of Maine
Hawkins Delafield Wood LLP
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• the cover page, or its equivalent, should
  identify the name of the State or State Issuer at
  least as prominently as the name of any private
  program manager or investment manager

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• a summary of key features of the Section 529 Plan

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• a prominent statement as to the absence or, if
  applicable, the nature of any guarantee (full
  faith and credit or otherwise) by, or recourse
  to, the State Issuer or the State
• if applicable, a prominent statement that the
  State tax treatment or other benefits offered by
  the State with regard to the Section 529 Plan are
  available only to the taxpayers or residents, as
  applicable, of the State
• in any event, a statement in bold to the effect
  that Section 529 Plans offered by other states
  may offer tax or other benefits to taxpayers or
  residents of those states that are not available
  with regard to the State Issuers Section 529
  Plan and that taxpayers or residents of those
  states should consider such state tax treatment
  and other benefits, if any, before making an
  investment decision
• if applicable, a prominent statement that the
  State offers one or more other Section 529 Plans

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• a prominent statement indicating the principal
  location or locations, in the Offering Materials,
  of disclosure addressing certain topics,
  including, at a minimum
• fees and costs
• investment options and investment managers and
  how and when the State Issuer may change these
• investment performance
• federal and state tax considerations
• risk factors
• limitations or penalties imposed by the Section
  529 Plan upon transfers or nonqualified
  distributions

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• a description of the federal tax considerations
  relevant to Section 529 Plans

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• a description of the state tax considerations
  relevant to the Section 529 Plan to which the
  Offering Materials relate under the laws of the
  State

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WHAT DOES THE DARN THING COST???
COME OUT, COME OUT WHEREEVER YOU ARE
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• a clear and concise description of the initial
  and on-going fees and costs, including whether
  fees are received by the State Issuer, by any
  private program manager or investment manager or
  by other private parties

• if applicable, that fees and costs are subject to
  change at any time
• all applicable fees should be disclosed in a
  single section of the Offering Materials
• which fees are determined by the amount invested
  and which fees are the same regardless of the
  account size and should disclose the total fees
  payable
• if a State Issuer receives a fee, the Offering
  Materials should disclose whether the use of that
  fee is restricted to Section 529 Plan purposes
  and should describe those purposes
• If there are fee reductions for any class of
  participants or type of withdrawal, those should
  be disclosed

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Continued

• the description of fees and costs should include
  a fee table
• if a Section 529 Plan includes fees and costs in
  categories that differ from the categories
  included in the suggested fee table form, then a
  different tabular presentation that is at least
  as specific should be used

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• a discussion of the performance of investment
  options which should generally conform to the
  requirements that would be applicable to the
  underlying investments if invested in directly

• to the extent available, investment option
  performance data should be disclosed for one,
  five and ten year periods
• to the extent not available, data should be
  disclosed for the life of the investment option
• performance data should be disclosed net of all
  generally applicable fees and costs and
  identified as such

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• a description of the investment options available
  under the Section 529 Plan
• a discussion of the investment risks associated
  with each option
• the description of investment options should also
  discuss the right of the State Issuer to change
  investment options or managers

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• a prominent discussion of risk factors associated
  with the Section 529 Plan which should be
  tailored to the particular Section 529 Plan but
  should include, at a minimum, the risks of
• investment losses,
• federal tax law changes,
• state tax law changes,
• Section 529 Plan changes and contributions to the
  Section 529 Plan may adversely affect the
  eligibility of the beneficiary or the account
  holder for financial aid or other benefits (which
  need not include a detailed description of
  benefits other than State and federal tax
  benefits)

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• contact information for the Section 529 Plan as
  well as its web address, if any

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• Suggested Fee Charts
• for
• Inclusion in Offering Materials

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1 For registered mutual funds, in the absence of
a change that would materially affect the
information, based on most recent fiscal year
reported upon in the applicable funds most
recent prospectus, and for investment options
invested in multiple registered mutual funds,
based on a weighted average of each funds
expense ratio, in accordance with the investment
options asset allocation among the applicable
funds as of date. 2 A footnote should
explain what the miscellaneous fee represents. 3
This total is assessed against assets over the
course of the year and does not include sales
charges or account maintenance fees. The
investor should be referred to the cost table
that shows the total assumed investment cost over
1-, 3-, 5-, and 10-year periods. 4 This footnote
should include a cross reference to a breakpoint
chart, if applicable. 5 If account
maintenance fees can be waived for certain
investors, it should be included in this
footnote. This footnote should explain that
the charge applies to sales during the first 12
months after the investment, if applicable.

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(No Transcript)
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1. For registered mutual funds, in the absence of
a change that would materially affect the
information, based on most recent fiscal year
reported upon in the applicable funds most
recent prospectus, and for investment options
invested in multiple registered mutual funds,
based on a weighted average of each funds
expense ratio, in accordance with the investment
options asset allocation among the applicable
funds as of date. 3 This total is assessed
against assets over the course of the year and
does not include sales charges or account
maintenance fees. The investor should be
referred to the cost table that shows the total
assumed investment cost over 1-, 3-, 5-, and
10-year periods. 5 If account maintenance fees
can be waived for certain investors, it should be
included in this footnote.
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Approximate Cost of 10,000 Investment
  1 Assumes redemption at the end of the
period 2 Assumes no redemption
42
(No Transcript)
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Electronic Distribution and Website Practices

• available guidance is primarily in the form of
  several SEC releases
• 33-7233 (October 6, 1995)
• 33-7288 (May 9, 1996)
• 33-7289 (May 9, 1996)
• 33-7856 (April 28, 2000)
• areas of concern for 529 Plans
• treatment of hyperlinked material
• evidence of delivery of disclosure documents
• consistency between website and disclosure
  documents
• republication theory in the context of a
  continuous offering

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Rule 15c2-12

• limited utility
• trap for unwary
• best policy would be for the SEC to amend Rule to
  exempt 529 Plans from continuing disclosure
  requirements and to and develop continuous
  offering concept

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Cost Containment

• schedule to permit reasonable professional work
• early, disciplined full working group involvement
• make sure working group understands real
  production and distribution requirements
• consider bidding production
• front load formatting
• tax disclosure

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Proposed Internal Revenue Service Circular 230
Tax Disclosure Requirements

• regulations governing tax advisors practicing
  before the IRS in connection with tax shelters
• currently expressly excludes tax-exempt bonds and
  does not address 529 Plans
• proposed elimination of exclusion raises separate
  issue of applicability to each
• defines tax-shelter opinion to include federal
  tax disclosure included in a public offering
  document
• requires consideration and conclusion with
  respect to any federal tax issue for which the
  IRS has a reasonable basis for successful
  challenge and which could have a significant
  impact under any reasonably foreseeable
  circumstance, on the federal tax treatment of a
  taxpayers item of income, gain, loss,
  deduction, or credit, the existence or absence of
  a taxable transfer of property, or the value of
  property
• requires specific cautionary language

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Regulation of Advertising and Sales

• MSRB Notice 2004-16
• NASD Special Notice to Members 03-17
• SEC Release 33-8358, file No. 57-06-04 (proposed
  Rules 15c2-2 and 15c2-3 confirmation and point
  of sale disclosure requirements)