If you sell 529 college savings plans, now is the time to tighten your sales practices to ensure client suitability. That’s because both the NASD and the SEC are cracking down on violations in sales of these popular programs.
The NASD, for example, fined Chase Investment Services Corp. of Chicago and MetLife Securities Inc., of New York, $500,000 each for not properly supervising the sale of 529 college savings plans. The NASD also ordered the two firms to compensate customers who were disadvantaged by the firms’ supervisory failures.
Meanwhile, the SEC levied a $100,000 penalty on 1st Global Capital Corp., a Dallas broker/dealer, for making unsuitable 529 recommendations and sales. At issue in the case was the firm’s failure to understand and analyze the comparative costs of 529 unit classes. “In a substantial number of the accounts reviewed, 1st Global sold customers products that were more costly and ultimately resulted in significantly less money for their children’s education,” said Rose Romero, district administrator for the SEC’s Fort Worth office.
In the cases of Chase Investment Services and MetLife Securities, the NASD found that both firms lacked specific procedures governing 529 sales, including suitability guidelines. “Brokers must consider all relevant factors, including possible state tax benefits, investment choices and expenses, and more in determining whether a 529 plan is a suitable investment for a particular customer,” said NASD Executive Vice President and Head of Enforcement James S. Shorris. “And brokers must disclose those factors to the customer.”
A sales practice likely to attract regulator scrutiny? Recommending an out-of-state 529 plan to a consumer who would achieve greater tax savings from using an in-state plan. If you do that, make sure you can defend your recommendation.
The out-of-state plan may provide lower fees and expenses, more desirable investment options, or fewer limitations and restrictions. These factors may tip the suitability scale in favor of the out-of-state plans.
What “red flags” are affecting your business? Send your comments to the National Ethics Bureau at firstname.lastname@example.org.