Regulators fired their first shot in what figures to be a round of enforcement actions against brokerages for abusive sales practices related to 529 college savings plans.
The NASD announced on Wednesday that it has slapped Ameriprise Financial Services, formerly known as American Express Financial Advisors, with a $500,000 fine for failing to supervise reps selling 529 plans. In addition, the NASD ordered the Minneapolis-based firm to reimburse investors to the tune of $750,000 for the more than 500 accounts adversely affected by its lax oversight. Ameriprise neither admitted nor denied any wrongdoing.
“I can see brokers pulling back on their efforts to promote 529 plans because of this type of risk, which is unfortunate because 529 plans can be the right vehicle for many of their clients,” says Joe Hurley, CEO and founder of SavingforCollege.com of Pittsford, N.Y. “Until they get a handle on this, there might be some impact on 529 sales.”
Regulators say that financial advisors aren’t explaining to clients that they may qualify for state income tax benefits by investing in their home state’s plan. The latest move is part of a broader investigation of 529 plans launched by the regulatory agency, which could involve up to 20 firms, analysts say. In 2003, the NASD began investigating six firms that were selling 529 plans, and has since widened its probe to 20 firms, a number of which are expected to agree to settle with regulators or face fraud charges.
The Ameriprise probe found that from May 2001 through the end of 2004, the company sold over $1.1 billion of 529 plans to more than 138,000 customer accounts during a time its compliance procedures were either not specific to 529s, or “not adequate to address the firm’s suitability obligations,” according to the NASD. From May 2001 through October 2003, roughly half of the states offered tax benefits to residents who purchased an in-state plan, yet Ameriprise sold only one 529 plan—the Wisconsin state plan. Roughly 32 percent of its sales—over $200 million—were to customers who lived in states with more tax-efficient 529 plans.
Despite the opportunity to reap tax deductions in their home states, Ameriprise sold over $55 million in the Wisconsin plan to customers living in New Mexico, South Carolina, Illinois, Colorado and West Virginia. NASD alleges that Ameriprise did not have procedures requiring brokers to consider the state income tax benefit of purchasing an in-state plan and compare benefits like investment performance, number of offerings and fees against out-of-state counterparts.
“It’s definitely a black eye for the 529 industry,” says Brian Boswell, a 529 analyst at Financial Research Corp. in Boston. “Anybody that was selling the programs to the degree that would it be considered abuse knew that their in-state program didn’t offer an advisor-sold program or wanted to sell a program that had a higher sales load and make a buck.”
Hurley agrees. “Brokers really should be providing that kind of guidance to their clients regardless of whatever procedures their firms have,” he says. “It’s pretty easy to evaluate the in-state tax deduction and put that in the list of considerations when choosing a 529 plan.”