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Financial Planning > College Planning > 529 Plans

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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.”

“A 529 plan is just a wrapper [with mutual funds inside], and they have to figure out the best way to advertise these so the consumer knows what he’s purchasing,” adds Jay Stillman, managing consultant at, noting that many investors seem to think that 529s are safer and less likely to diminish in value than mutual funds simply because they’re government-issued. “At first it was just, ‘Let’s get these things out there,’ but as these programs get bigger, I think there’s going to be more scrutiny of what kinds of disclosures are being put on them.”

One disclosure requirement advocated by the Washington, D.C.-based Investment Company Institute is a rule aimed at informing investors of the favorable state tax implications of investing in their home state’s 529 plan. The Institute sent a letter to the MSRB on April 1 requesting that this information be included in a written disclosure to 529 plan investors. “Generally there are preferential provisions for investing in your home state’s 529 plan,” says Baker, “[and] there is some concern that in making recommendations, there may have been a failure to take state tax issues into account.”

To provide greater oversight of plan sales, the MSRB is working on creating a test that would qualify securities principals to supervise brokers peddling 529 plans. “We’re in the process right now of developing an exam for people who are supervising those who are selling 529 plans,” says Taylor. “By sometime this fall, hopefully by October 1, we hope to have in place an examination that is solely for that purpose.” According to the MSRB, all municipal securities transactions must be supervised by a qualified municipal securities principal (Series 53 license). That rule was temporarily amended in July 2001 to accommodate the influx of firms that wanted to sell 529 plans; under the provision, if a firm’s involvement in municipal securities was limited to 529 plans and the firm had fewer than 11 associates involved in municipal securities, the firm could designate a Series 26 or Series 24 principal to fill the role until July 2002. In March, however, the MSRB proposed an amendment that axed the 11-person limit, extended the interim period to December, and provided for the creation of the aforementioned exam that, if passed by January 1, 2003, would allow Series 24 and 26 principals to supervise 529 plan transactions indefinitely.


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