NASD Looks at Sales of Out of State 529 Plans
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Monday, November 29, 2004

NASD Looks at Sales of Out of State 529 Plans

The NASD is raising its eyebrows over sales of out of state 529 plans. The self-regulatory organization found in its initial sweep of six brokers selling 529 plans that out-of-state plans account for as much as 90 percent of sales says NASD Vice Chairman Mary Schapiro. That may point to a problem and the NASD is redoubling its sweep and is seeking information from up to 20 broker-dealers, reports Dow Jones Newswire.

Sales of out-of-state plans raise questions of whether brokers are selling plans that are the most appropriate for investors, or whether they are favoring proprietary products. Most states now offer plans that can sold nationwide, however, many states apply favorable tax treatment only to residents in their own state's plans.

The probes focus attention on a market that has not worked out as expected for fund distributors. When the plans were first created in the late 1990s, many fund firms expected college savings plan to be the "next 401(k)." That expected growth has yet to take place and many plan administrators are finding it difficult to make money in the business as state's are keeping a tight grip on administration fees. The margins are slim enough that State Street is seeking to pull out of the business of acting as a 529 plan administrator, according to

Meanwhile, the SEC's look into 529 college savings plans has reached at least as far as American Funds and Edward Jones & Co. Dow Jones reported last week that the fund firm and broker-dealer have been asked by regulators at both the SEC and the NASD about the Virginia 529 plan.

The requests are believed to be part of the larger information sweep by a special SEC task force and the NASD on how the 529 plan market operates. If that is the case, most major fund firms likely received similar requests for information. The sweeps do not imply that the SEC found anything wrong. The NASD has asked 20 brokerage firms for data on 529 sales practices.

John Boul, a spokesman for Edward Jones, explained that the firm "received an inquiry from the SEC, and I believe it was part of a routine industry inquiry into 529 plans." He added that the brokerage referred the NASD to the information it provided to the SEC when the self-regulatory organization contacted it.

The prominence given the Dow Jones report by many newspapers shows that the fund industry remains under suspicion in the minds of many editors.

Chuck Freadhoff, a spokesman for American Funds, also confirmed the fund giant has "had a lot of inquiries, including inquiries into the 529 plans as part of the wider information gathering." He also confirmed that the SEC is among the ranks of regulators asking for information.

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