At Deadline - NASD Probes B/D Sales Of College Savings Plans
November 10, 2003
NASD Probes B/D Sales Of College Savings Plans
WASHINGTON - The National Association of Securities Dealers is conducting a sweep of broker/dealers involved in state college savings programs to determine if investors are being sold unsuitable investments. A NASD spokesman declined to confirm or deny whether such a sweep is taking place.
But the inquiry surfaced at a Municipal Securities Rulemaking Board forum on 529 college savings programs. One of the goals of the forum was to make clear that anyone who sells 529s that include bond funds must comply with Securities and Exchange Commission, MSRB and NASD rules for municipal securities.
Steven B. Boehm, a partner at Sutherland Asbill & Brennan, said, "It appears to be a sweep [for] potential abusive situations. There is significant information being gathered."
Sources said the sweep raises questions about suitability and disclosure issues, including whether broker/dealers are selling investors shares in out-of-state college savings plans without disclosing to them that they will not get the state tax benefits that they would receive from plans offered by their home state.
Martha Mahan Haines, chief of the SEC's office of municipal securities, noted that investors in college savings plans typically are individuals who are "relatively inexperienced" and "kind of vulnerable." Haines urged state officials, broker/dealers and 529 providers to "look to the rules that the SEC has put out for mutual funds for guidance" on how to help investors compare product' fees and performance. Market participants are not required to comply with them, she said, but, "to a large extent, they can be applied to 529 plans and are very good guidance."
Haines also urged the College Savings Plans Network to consider developing some guidance or best practices in this area. "Having some consistency, especially in these areas, would really be beneficial for the reputations of 529 plans in general as well as investors," Haines said. Members of the network said they are currently reviewing disclosure documents to see if they can come up with guidance.
Haines also warned that the firms involved in marketing municipal fund securities in these plans are subject to the MSRB's Rule G-37, which effectively bars dealers from making significant political contributions to issuer officials to get municipal bond business.
Ernesto A. Lanza, the MSRB's senior associate general counsel and expert on 529 plans, said that under an MSRB interpretation of the rule, if a firm involved in a 529 plan makes a contribution that runs counter to G-37, it is not required to pull out of the plan, but is prohibited from expanding its role in the plan or even from raising its fees.
Panelists also discussed the impact of the Dec. 31, 2010, expiration date of the law that allows 529 plans to be tax-exempt.
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