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529 Savings Plans on Regulator Radar
January 2007—If you sell 529 College Savings Plans, now is the time to tighten your sales practices to assure client suitability. That’s because both the NASD and the SEC are cracking down on violations in sales of these popular programs.
The NASD, for example, fined Chase Investment Services Corporation of Chicago and MetLife Securities, Inc., of New York, $500,000 each for not properly supervising the sale of 529 College Savings Plans. NASD also ordered the two firms to compensate customers who were disadvantaged by the firms’ supervisory failures.
Meanwhile, the U.S. Securities and Exchange Commission levied a $100,000 penalty on 1st Global Capital Corporation, a Dallas broker-dealer, for making unsuitable 529 recommendations and sales. At issue in the 1st Global case was the firm’s failure to understand and analyze the comparative costs of 529 unit classes. ”In a substantial number of the accounts reviewed,” said Rose Romero, District Administrator for the SEC’s Fort Worth Office, “1st Global sold customers products that were more costly and ultimately resulted in significantly less money for their children’s education.”
In the cases of Chase Investment Services and MetLife Securities, the NASD found that both firms lacked specific procedures governing 529 sales, including suitability guidelines. “Brokers must consider all relevant factors, including possible state tax benefits, investment choices and expenses, and more in determining whether a 529 Plan is a suitable investment for a particular customer,” said James S. Shorris, NASD Executive Vice President and Head of Enforcement. “And brokers must disclose those factors to the customer.”
A sales practice likely to attract regulator scrutiny? Recommending an out-of-state 529 plan to a consumer who would achieve greater tax savings from using an in-state plan. If you do that, make sure you can defend your recommendation. For example, the out-of-state plan may well provide lower fees and expenses, more desirable investment options, or fewer limitations and restrictions. One or more of these factors may tip the suitability scale in favor of the out-of-state plan.
What “Red Flags” are affecting your business? The National Ethics Bureau welcomes your input. Send your comments to: hlew@ethicscheck.com
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