Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

News Flash - NASD 529 Probe Deepens Due to Out-of-State Sales


The National Association of Securities Dealers has widened its inquiry into sales of 529 plans by investment advisors and brokers, more than tripling the number of firms under scrutiny to 20. The regulator began its fact-finding investigation in June of 2003 with an analysis of six large broker/dealers.

"Our initial criteria were firms that had had investor complaints, or that sold only one 529 plan, and where 529 plans were a significant part of the firm's business," said Herb Perone, spokesman for the NASD. "We have twice expanded the scope of the thing to add additional firms with additional criteria, to get an accurate view of sales of 529 plans," he said. Perone declined to reveal what additional criteria the NASD is now using, but said the inquiry could continue to widen.

While in-state plans are not always the best option once costs and performance are considered, the NASD is concerned that some brokers may be selling consumers expensive out-of-state plans in order to win hefty commissions, in turn cheating consumers out of tax-breaks. (Twenty-five states and the District of Columbia offer state tax incentives for purchasing an in-state plan.) The NASD recently issued an investor alert on 529s on its Web site, urging consumers to choose 529 plans carefully, offering a comprehensive review of state tax breaks offered, and providing advice on how to compare fees and expenses.

There is no timeline for the NASD probe, which could result in best practice guidelines or enforcement actions, Perone said. "Sales of out-of-state plans are in the neighborhood of 90%, which is a red flag for us. There's nothing inherently wrong with it, but the concern would be whether these sales are suitable and all of the necessary disclosures are being made." The NASD doesn't have any regulatory jurisdiction over 529 plans themselves, but they do have jurisdiction over the brokers and brokerage firms that sell them.

In the meantime, the College Savings Plan Network, a trade group run by the National Association of State Treasurers, has created a set of voluntary disclosure guidelines for the industry and some member states have begun implementing them, including Maine and Oregon. The group agreed upon the guidelines at its annual conference in May in an effort to preempt regulatory action by the NASD, SEC and Congress. The CSPN has shared these guidelines with regulators but hasn't yet received any feedback on them, said spokesman Chris Hunter, who expects that the majority of states will implement the guidelines over the next 12 to 18 months.