TO: Board of Regents

FROM: Cathy Swift

RE: Montana Family Education Savings Program

DATE: Sept. 9, 2005

Pursuant to legislation proposed by OCHE and carried by Sen. John Brueggeman (SB 432), the 2005 Legislature enacted changes to the Montana Family Education Savings Program. The changes resulted from an SEC interpretation that college savings accounts are securities subject to the regulation of the SEC unless the accounts are issued by a governmental issuer. Following the lead of other similarly-situated states, Montana amended the MFESP to make the family education savings trust an instrumentality of state law, thereby qualifying it for the SEC's municipal securities exemption.

Under the revised law, the Board of Regents is made the trustee and administrator of the trust, which consists of participating trusts, each of which corresponds to a "program account." Payments to the trust are made by account owners pursuant to participating trust agreements between the account owners and the Board of Regents as trustee.

The new law is effective October 1, 2005 for new accounts. Between October 1 and December 31, 2005, old accounts may be converted to the new structure. Old accounts not converted voluntarily by December 31, 2005, are transferred to the new structure on that date. While the new law makes changes in the form of the program, it will not greatly affect operations. Account owners will continue to work directly with the program manager (College Savings Bank) and the investment manager (Pacific Funds), which will accept contributions and make distributions on behalf of the trust.

The law gives the Regents greater involvement and responsibility in the program. The Board is now the issuer of the accounts and the offering documents must now be written in the name of the trust. Changes have been proposed to the existing Regents' policy to reflect this new structure. Numerous definitional provisions and other terms have been changed to reflect the new structure and terminology. The major substantive changes are those incorporating the Regents new authority and responsibility over the trust, the actions of the program managers, and the offering documents. In addition, the new policy addresses the termination and nonrenewal of a contract with a manager and provides for the transition of old accounts to the new system. Under the policy, the Board of Regents retains authority over the selection of the program and investment managers and the determination of the investment products to be offered. The policy delegates the authority to approve documents to be used in connection with the program to the Commissioner of Higher Education or her delegee. The policy also allows the Commissioner to authorize the investment manager or program manager to make certain ministerial changes to the documents, including clerical or technical changes.