Fund providers may be facing another bout of regulatory scrutiny, but this time it may be over 529 savings plans.
While the SEC may not have jurisdiction over the plans, Senator Peter Fitzgerald
(R, Illinois) is out to make sure someone is watching the cookie jar.
In a Senate subcommittee hearing
on 529 plans, Fitzgerald brought several issues to the fore: high and complicated plan fees, dubious plan sales practices, lack of disclosures, and lack of competition.
The plans are even more problematic than mutual funds: "as problematic as ordinary mutual funds may be, many section 529 plans are even more problematic. Thatís because the state governments which run section 529 plans are exempt from most of the federal securities laws, including the Investment Company Act of 1940. Indeed the Securities Exchange Commission does not have jurisdiction over the state governments which run the college savings plans."
Fitzgerald devoted a good portion of his testimony
to lambasting the "middlemen" -- including state bureaucracies -- that are whittling away the tax benefits of the plans.
NASD's Mary Schapiro
, who is vice chairman and president of regulatory policy and oversight, responded with results of the agency's investigation into 529 plan managers.
The agency's review of broker-dealer sales practices has turned up some disturbing trends: in a sample of six broker-dealers, NASD found that more than 90 percent of sales were to out-of-state residents, indicating that brokers pushed investors to plans without tax benefits. The review was conducted last summer.
NASD has subsequently sent follow-up letters to the six firms and an additional 12 broker-dealers in March. The additional investigations have turned up similar findings --that "the vast majority of sales were made to residents outside of the state that sponsored the 529 plan."
Violators can expect repercussions, from "fines, restitution to customers, and the potential for suspension or expulsion from the industry," stated Schapiro.
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