An Education on 529 Plan Regulation

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 Savingforcollege.com, 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.