Rankings, Volatility Ratings, and Municipal Fund Securities
Quick Answer
Three specialized rules govern public communications in this area. FINRA Rule 2212 requires investment company rankings to use independent Ranking Entities and standardized time periods. Rule 2213 governs bond fund volatility ratings, which may never be labeled "risk" ratings. MSRB Rule G-21 and SEA Rule 15c2-12 regulate municipal fund securities ads, 529 plan disclosures, and EMMA continuing-disclosure filings.
Three specialized communication areas round out the unit: fund rankings (Rule 2212), bond fund volatility ratings (Rule 2213), and municipal fund securities (MSRB Rule G-21 and SEA Rule 15c2-12). Each one has its own advertising-specific requirements that the Series 6 exam tests directly.
What does FINRA Rule 2212 require for investment company rankings?
Rankings in retail communications must come from independent Ranking Entities. A fund cannot create its own ranking.
Ranking Entity definition:
- Independent of the investment company and its affiliates
- Provides general information about investment companies to the public
- Services are not procured by the investment company or its affiliates to assign the ranking
Exception: A fund-created ranking is only allowed if it uses a Ranking Entity's performance measurements (not the fund's own).
Which time periods must investment company rankings cover?
Rankings based on total return must be accompanied by rankings for standardized periods from the same Ranking Entity, for the same investment category, and over the same time period.
Required ranking periods by fund age:
- At least 1 year: 1-year ranking
- At least 5 years: 1-year AND 5-year rankings
- At least 10 years: 1-year, 5-year, AND 10-year rankings
If rankings for these periods are not published by the Ranking Entity, use short, medium, and long-term ranking periods as published.
Other Rule 2212 requirements:
- Rankings may NOT cover a period of less than one year (unless the ranking is based on yield)
- Rankings must be current to at least the most recent calendar quarter ended prior to submission for publication
- A headline or prominent statement must not state or imply the fund is the "best performer" in a category unless it is actually ranked first in that category
Exam Tip: Gotchas
- A total-return ranking for a fund in existence for 6 years must show 1-year AND 5-year rankings. Showing only a 1-year ranking for a 6-year-old fund is a Rule 2212 violation.
- Rankings may NOT cover a period of less than 1 year. The only exception is a ranking based on yield (not total return). Advertising a 6-month total-return ranking is a Rule 2212 violation.
How does FINRA Rule 2213 regulate bond fund volatility ratings?
A volatility rating measures the sensitivity of a bond fund's Net Asset Value (NAV) to changes in market conditions (primarily interest rates). Under Rule 2213, a volatility rating:
- MUST NOT be described as a "risk" rating
- Must be based exclusively on objective, quantifiable factors
- Must be clear, concise, and understandable in its disclosures
Exam Tip: Gotchas
A bond mutual fund volatility rating must NEVER be called a "risk" rating. The exam tests this exact word swap.
What disclosures must accompany a bond fund volatility rating?
Each bond mutual fund volatility rating must include:
| Disclosure Item | Purpose |
|---|---|
| Name of the entity that issued the rating | Source attribution |
| Date of the current rating | Staleness prevention (must be current to most recent calendar quarter) |
| Link or website address to criteria and methodology | Transparency |
| Statement that there is no standard method for assigning volatility ratings | Clarifies subjectivity across raters |
| Whether consideration was paid to obtain the rating | Conflict disclosure |
| Types of risks the rating measures (and which it does NOT measure) | Scope clarity |
| Statement that there is no guarantee the fund will continue to have the same rating or perform as rated | No-guarantee language |
The entity that issued the rating must also provide detailed disclosure on its rating methodology via a toll-free phone number, a website, or both.
What does MSRB Rule G-21 require for municipal fund securities advertising?
MSRB Rule G-21 covers dealer advertisements relating to municipal fund securities, including:
- 529 college savings plans
- Local government investment pools (LGIPs)
- ABLE accounts (for individuals with disabilities)
General standards:
- No dealer may publish any advertisement concerning municipal securities that the dealer knows or has reason to know is materially false or misleading
- Each advertisement must be approved in writing by a municipal securities principal or general securities principal prior to first use
- Records of all advertisements must be maintained per MSRB recordkeeping rules
Exam Tip: Gotchas
Municipal fund securities advertising requires written pre-approval by a municipal securities principal or general securities principal under MSRB Rule G-21. Verbal or after-the-fact approval does not satisfy the rule.
When must a 529 plan advertisement include an out-of-state disclosure?
For advertisements that reference by name a specific 529 plan or 529 plan issuer, the communication must include a disclosure that the investor should consider, before investing:
- Whether the investor's or designated beneficiary's home state offers any state tax or other state benefits only available through the home-state plan (financial aid, scholarship funds, creditor protection)
Exception: This out-of-state disclosure is NOT required if the ad is distributed solely to residents of the sponsoring state and is not otherwise made available to anyone else.
Exam Tip: Gotchas
A 529 plan advertisement distributed nationwide (or placed on a publicly accessible website) MUST include the out-of-state home-state-benefits disclosure. The only exception is an ad distributed solely to residents of the sponsoring state. A national mailing, a non-state-restricted website, or a national TV spot does not qualify for the exception.
How is 529 plan performance data standardized?
Performance data in 529 plan advertisements must comply with month-end performance standards modeled on Rule 482, the same standardized-performance framework used for mutual fund advertising, applied to the municipal fund securities context.
What does SEA Rule 15c2-12 require for municipal securities disclosure?
Rule 15c2-12 is the SEC's disclosure framework for municipal securities offerings.
Key requirements:
- Underwriters of municipal securities must obtain and distribute:
- Official Statements (OSs) and Preliminary Official Statements (POSs) to investors in primary offerings
- Imposes continuing disclosure obligations on issuers:
- Annual financial information
- Material event notices
- Filed via the MSRB's EMMA (Electronic Municipal Market Access) system
- Applies broadly to municipal securities offerings, including 529 plans and other municipal fund securities (with certain exemptions)
Exam Tip: Gotchas
Rule 15c2-12 continuing-disclosure filings go to the MSRB's EMMA system, not directly to the SEC. The exam can test where annual financial information and material-event notices are filed.