Ever since 529 plans hit the scene, they’ve been considered the valedictorians of the college savings class, and their popularity has ballooned faster than a first-year student gaining the “freshman 15″; last year, funds in such plans tipped the scales at more than $10 billion, according to the College Savings Plan Network. As regulators struggle to keep up with these burgeoning and ever-changing plans, advisors should expect to see additional regulations dictating how the plans can be advertised and sold. “I can almost guarantee you, sitting here today, that we’ll be making changes fairly frequently for the next two years,” says Christopher Taylor, executive director of the Municipal Securities Rulemaking Board (MSRB), which regulates the purchase and sale of 529 plans.
Although 529 plans are built with mutual fund building blocks, they fall under the MSRB’s jurisdiction because they’re issued by the states. When 529 plans were created, the MSRB, which previously had concerned itself with rather stodgy things like state-issued road-building bonds, suddenly found itself in charge of a whole new crop of very different investments. “Our existing rules hadn’t contemplated these types of securities,” says Taylor. The MSRB made numerous modifications to its rules, and “to the extent possible, we have tried to make those modifications consistent with regulations and rules adopted by the NASD and by the SEC for mutual funds,” he says. Still, there’s always more to be done, he notes: “At nearly every meeting, there’s another issue that comes up.”
While Taylor believes the MSRB has thus far done a bang-up job of morphing its rules to fit 529 plans, others aren’t quite so sure. “The MSRB does have some special rules in place for 529 plans,” concedes John Baker, a securities lawyer with Stradley Ronon Stevens & Young in Washington, D.C., “but the concern is that their rules do not do enough to take into account the special attributes of these securities. When you get right down to it, these plans are very much like mutual funds, so there are some very valid questions that can be raised as to why these things are not regulated as mutual funds, particularly on the promotional side.”