Effective November 19, 2001 the National Securities Clearing Corporation ("NSCC") will modify Fund/SERV, so as to enable transactions for Section 529 Qualified State Tuition Programs ("529 Plans") to be processed and settled through Fund/SERV. At that time however, 529 Plans will not be eligible for any other Mutual Fund Service, so modifications are being made only to the Fund/SERV system and not to any other Mutual Fund Service.

In order for participants to effectively process Section 529 investment fund transactions in a standardized and more automated way through the Mutual Fund Services' Fund/SERV system, new voluntary enhancements will be made to the Fund/SERV formats on November 19, 2001. Please see attached Exhibit A for background on Section 529 Plans and details regarding the system modifications.

Before transactions in 529 Plans may be processed:

• Participants must complete the "ADD" Security Issue ID form (CUSIP Profile form) found on our website at fundserv.nscc.com under "Connectivity" to add the new Security Type Code 61 Section 529 Qualified State Tuition Program. The CUSIP Profile form must be completed online and submitted electronically to the Enterprise Service Center (ESC) for review– faxes will no longer be permitted.

• In addition, please call the Mutual Fund Hotline at (212) 855-8877 for a copy of the Non-Registered Investment Product Fund/SERV Checklist or download a copy from our website. Participants must complete and mail it to their Mutual Fund Marketing Specialist, along with the appropriate requested documentation for the Section 529 Plan. No 529 Plan CUSIP will be added to NSCC’s systems until this information is provided.

The revised file layouts will be posted to the NSCC website, formats.nscc.com very shortly for participants to review. Participants are encouraged to test the layout changes prior to the implementation date of November 19, 2001. Beginning November 5, 2001, testing of the new record layouts will be provided in the Participant Services Environment (PSE) region. Participants wishing to test must contact the Enterprise Service Center Participant Test Group (PTG) at (212) 855- 5630. To ensure proper set up for the PSE region, a request must be received by PTG at least three days prior to the date you wish to initiate testing.

Participants with questions about the procedures and requirements to add 529 Plans to the Fund/SERV system should call their Mutual Fund Marketing Specialist or the Mutual Fund Hotline at 212-855-8877.

Any questions or concerns regarding this Important Notice can be directed to the Mutual Fund Hotline at 212-855-8877 or the undersigned at 212-855-5677.

Rita A. Gribben
Mutual Funds Marketing

Appendix A

 

This Appendix provides background information supporting the industry initiative to develop standardization and automation of order placement relative to Section 529 Qualified State Tuition Plan accounts. As of the date of this notice, many legal and legislative issues are still being addressed. Therefore, while the following is based on information currently available, it is subject to change:

• Section 529 Plans are established by a state or an agency of a state, enable residents of any state to save money on a tax-advantaged basis to pay qualified higher education expenses for their designated beneficiaries.

• Qualified expenses include certain eligible tuition, fees, cost of books, supplies, equipment and room and board costs.

• Generally, assets of a 529 Plan are held in a separate trust, which engages a fund management company to serve as manager of the plan (Program Manager).

• Interests in 529 Plans are deemed to be municipal fund securities and are not registered with the U.S. Securities and Exchange Commission. Participants should check with the Municipal Securities Rulemaking Board ("MSRB") and their primary regulator to determine their eligibility to distribute interests in 529 Plans.

• Each account can only have one beneficiary and only an individual can be a designated beneficiary.

• The Account Owner may name an individual as Successor Owner to automatically become the owner of the Account upon the death of the Account Owner.

• Types of withdrawal options: Qualified and Non-Qualified (may be subject to penalty). (See below - withdrawal processing will not be part of Phase 1 implementation.)

Modifications to the Fund/SERV system will be handled in several phases for the Section 529 Plans. Phase 1 enhancements to Fund/SERV will address Fund/SERV initial purchases and subsequent purchases for 529 Plan accounts.

Withdrawals/ redemptions require evidence of enrollment, and due to the strict requirements associated with withdrawals, it is NSCC's understanding that the industry intends to first process only initial purchases and subsequent purchases through Fund/SERV. Accordingly, no modifications are being added to address 529 Plan withdrawals. While Fund/SERV will not reject any withdrawal orders for 529 Plans, it is up to the Fund to accept or reject such transactions.

The Fund (Program Manager) is responsible for the legal and tax accuracy of qualifying vs. non-qualifying appropriateness of a withdrawal, and it must receive proper documentation from the account owner and beneficiary before the proceeds can be distributed.

1. For Original transactions, particularly broker transactions, such as Orders (001), As of Orders (004), Exchanges (015), etc., NSCC will pass the transaction to the Fund, and the Fund will make the decision to confirm or reject it. Reminders will be sent if the transaction is not confirmed or rejected by the Fund in the normal processing timeframe.

2. Fund/SERV will process subsequent transactions, i.e. Firm Delete (102), Firm Exit (139), Correction (003), Cash Adjustment (011), etc. according to Fund/SERV system rules today (i.e. no exception processing for 529 Plan accounts).

3. Exchange Orders ( Record type 015): Although an exchange order is one transaction, it involves both a redemption and a purchase. The format on the purchase side of the 015 record has been modified; the redemption side of the exchange order (015) will not be changed at this time. NSCC will pass the Exchange Order to the Fund and they will confirm or reject the Exchange Order transaction.

4. If an initial purchase is processed in the Fund/SERV system, then a Full Registration is required, according to current Fund/SERV rules today. A Registration (full or short) is not allowed on a subsequent purchase. However if a Registration came against an initial purchase, and the order was changed later on (by a correction or confirmation) to be a subsequent purchase, the registration process must continue as in regular Fund/SERV orders.

5. NSCC will not reject any transactions, (i.e. ACATS Transfer/Acknowledgement/ Rejection; TORA, etc.) where the security issue type identifier code in the system is 61, Section 529 Account - Qualified State Tuition Program.

6. NSCC will not edit for consistency between the 2 new "IRA/DCP/529 indicator codes: D - 529 Account, and E - UGMA account Transferred to Section 529 Account, and the new values added to Security Type, NAV Reason Code, Settlement Override Reason Code, and Social Code. For example:

IRA/DCP/529 Indicator = D or E and Security Type is not 61
IRA/DCP/529 Indicator is not D or E and Security Type = 61
Security Type = 61 and the record layout does not have IRA/DCP/529 Indicator.

It is up to the Fund to determine whether to accept or reject such transactions.

7. The IRA/DCP/529 Indicator cannot be changed by a subsequent transaction from D or E to something else, or from something else to D or E. A subsequent transaction trying to change it in that manner will be rejected by Fund/SERV. However, the IRA/DCP/529 Indicator can be changed by a subsequent transaction from D to E or from E to D.

8. A Section 529 Order cannot be changed by subsequent transactions (corrections, confirmations, etc.) from one type to another. An Order cannot be changed from Section 529 to a non-Section 529 order and vice versa.

A new Security Type Code for 529 Plans will be added:

61 = Section 529 Account - Qualified State Tuition Program.

 new code to the Social Code Table will be added for 529 Accounts:

37 = Section 529 Account- Qualified State Tuition Program

All fields are optional.

1. A new field called Date of Event (DOE) has been added. The Date of Event is generally the date the 529 Beneficiary will enter college.

2. The field called " Number of Payables/ IRA Beneficiaries" will be renamed:

- " Number of Payables/ Beneficiaries"

3. There are 6 payable records available on the registration record. To accommodate the 529 Beneficiary and the 529 Successor Owner information, the additional existing payable records will be used to communicate payable information and/or IRA beneficiary information and/or 529 Beneficiary information and/or 529 Successor owner information.

The Payable Address Option field/ Beneficiary Address Option field, will be expanded to include two new indicators:

C = 529 Beneficiary
D = 529 Successor Owner

If address option = C, then record 9 represents 529 Beneficiary
If address option = D, then record 9 represents 529 Successor Owner

Record 9 can have a Payable format or Beneficiary format. The current Beneficiary format will also be used for either IRA Beneficiary or 529 Beneficiary.

4. The field called " Payable 1/ IRA Beneficiary 1 /Name/Address Line 1 " will be renamed:

" Payable 1/ Beneficiary 1 / Name/Address Line 1". This repeats for Payable 2, 3, 4,etc.)

 

1. A new code will be added to the existing Settlement Override Reason Codes :

05 = Section 529 Account -Qualified State Tuition Program

The Settlement Override Reason code will enable the Firm to select how the Section 529 trade is to settle, without regard to the Fund's Security Profile. The Firm does this by providing the "Anticipated Settlement Date" in the Fund/SERV order for the transaction, and using the above reason code for invoking the Override. The Fund in turn has the option of confirming or rejecting the Section 529 order.

2. A new code will be added to the existing NAV Reason Codes :

9 = Section 529 Account - Qualified State Tuition Program

Using the above NAV Reason Code will qualify a Net Asset Value trade for the Section 529-purchase order.

1. A new field called Beneficiary SSN/EIN Number has been added.

2. A new field called Beneficiary SSN/EIN Indicator has been added. This is an optional conditional field. If the Beneficiary SSN/EIN Number is provided, then an indicator of 0 = Tax ID Number or 1 = Social Security Number must be used.

   Using the Beneficiary SSN/EIN Indicator qualifies whether it is the Beneficiary's Tax ID number or the Beneficiary's Social Security number on the order.

3. The field called " IRA/DCP Indicator" will be renamed "IRA/DCP/529

Indicator" and two new indicator codes will be added:

D = Section 529 Account -Qualified State Tuition Program
E = UGMA account transferred to Section 529 Account

Using the above IRA/DCP/529 Indicator codes will qualify the type of contribution that is being made by the Section 529 Plan purchase order.

1. For Section 529 Plan accounts, use the Shareholder Date of Birth field for the 529 Plan Beneficiary's Date of Birth.

Please refer to the revised record layouts which will be posted to the NSCC website http://formats.nscc.com, very shortly for the new reject codes that will support the Section 529 Plan product.