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Regulation and Compliance > Federal Regulation

An Education on 529 Plan Regulation

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If college savings and 529 plans are not yet perceived as being as natural together as Abbot and Costello or Scotch and soda, they should be–the tax advantages of 529s are hugely significant. But there’s been some confusion over which regulatory agency oversees 529s–and why–and what the regulations are. To remedy that confusion and give notice to interested parties in such vital advisor-client areas as 529-plan advertising, sales practices, and suitability, the Municipal Securities Rulemaking Board on May 22 issued detailed guidelines applying to the broker/dealers and others that sell these increasingly popular plans. (See–5-02.htm)

As John Baker, a securities lawyer with Stradley Ronon Stevens and Young in Washington, D.C., puts it, “When you have a popular product that is a subject of a lot of advertising, then the fact that it’s essentially unregulated becomes much more striking.”

Alexandria, Virginia-based MSRB was established by Congress in 1975 to regulate securities firms and banks involved in underwriting, trading, and selling municipal securities; i.e., bonds and notes issued by states, cities, and counties to help finance public projects. While many a hard-strapped family would consider the magnitude of college expenses worthy of public project status, some in financial services believe it odd that the Municipal Securities Rulemaking Board bears responsibility for 529 regulation, and not the Securities and Exchange Commission or the National Association of Securities Dealers, which regulate mutual funds.

Christopher Taylor, MSRB’s executive director, explains that the decision regarding where 529 regulation belongs was made by the SEC and the NASD when 529s began their ascent to prominence four years ago. At that time, 529s were deemed securities issued by state and local governments, and the task of regulating them was given to the MSRB. “In effect, what we had to do was immediately start adjusting our rules to accommodate this new type of security,” says Taylor. “For the most part we’ve tried philosophically to stay in concert with what was going on in the [mutual] fund area. And [with the new guidelines] I think we’ve done that, with a relatively small number of exceptions, which really are based on the difference between [a 529 plan] being a municipal security and an investment company security.”

One of MSRB’s guidelines–and an area illustrative of how municipal security regulations differ from those of an investment company security–is Rule G-21. This rule establishes a general ethical standard for dealer advertisements that among other things prohibits claims concerning municipal securities (including 529 plans) that are materially false or misleading. The guidelines also stress clarity and accuracy in advertising the costs, risks, and possible negative tax consequences. Mutual fund companies must submit advertisements to the NASD for review and approval, but advertising for 529 plans does not have to clear the NASD. While the NASD is charged with enforcing MSRB rules, “NASD rules do not override ours,” says Taylor.

Other significant areas addressed by the MSRB guidelines, and of particular concern to advisors, are suitability and taxes. CPA and 529-plan guru Joseph Hurley, CEO of, an Internet-based publishing and consulting company with a 529-plan focus, has long been wary of the one-plan-fits-all approach espoused by some plan sellers. “I just don’t know if that flies,” says Hurley. He points out that all 50 states and the District of Columbia have plans that are operative or under development, and that they can differ greatly.

“What’s coming out of the MSRB [guidelines] is that the best program for one investor may not be the best for another one, especially when you throw in state tax considerations,” Hurley says. He has walked into bank branches “that might have one particular 529 program that the bank B/D is representing, and [the bank] doesn’t know about anything else.” For example, a dealer would violate MSRB Rule G-17 by neglecting to “inform the customer that investment in the Section 529 college savings plan of the customer’s own state did not provide the customer with any state tax benefit when the dealer knows or has reason to know that such a state tax benefit likely would be available.”

Securities lawyer Baker reports that none of his clients, which include securities dealers and investment advisors, had problems with 529 plans before the guidelines were implemented, nor has he heard of any 529-related lawsuits. And as MSRB’s Taylor notes in regard to the guidelines, “I wouldn’t say there’s anything earthshaking in here.” Nonetheless, it behooves advisors to be aware of the protections offered their clients, especially in regard to product suitability and state taxes, and stay up to date should there be future regulatory changes.


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