MSRB to decide on controversial 529 proposals

Feb 13, 2006 @ 12:01 am

By Charles Paikert

NEW YORK - One of the most fiercely debated and long-simmering issues in the world of 529 college savings plans is about to come to a boil.

The Municipal Securities Rulemaking Board this week will meet to decide the fate of a rule proposal that would considerably ratchet up disclosure and suitability requirements for broker-dealers selling the plans.

The rule change also would mandate that firms must inform investors of any tax benefits they might forfeit by investing in plans outside their home states.

Since being introduced by the Alexandria, Va.-based MSRB last year, the proposal has drawn sharp criticism from state officials and financial services companies for being unnecessarily burdensome. If passed, the proposal also might force some advisers to stop selling 529 plans altogether, critics also say.

The debate comes as the regulatory scrutiny of sales practices involving 529 plans may already be dampening their sales. Net investments in 529 plans fell to $13.69 billion last year, from $13.72 billion in 2004, according to Boston-based Financial Research Corp.

Given that 82% of the money sitting in 529 plans passed through the hands of an adviser, the adoption of the proposed disclosure and suitability guidelines could lead to the "extinction" of the plans in their current form, said Bill Raynor, vice chairman of the College Savings Foundation, a Washington-based trade association for financial services firms in the 529 industry.

"It would make brokers responsible for plans they don't even sell," said Mr. Raynor, who also is vice president of college savings plans for New York-based OppenheimerFunds Inc.

Indeed, the MSRB's proposal would place an "onerous burden" on brokers and would have a "chilling effect" on 529 sales, said foundation board member Bruce Harrington, who is vice president and director of product development for Boston-based MFS Investment Management Inc.

But Mr. Harrington and other industry executives are hopeful that the MSRB will tone down the proposal before making a final ruling on the matter. That ruling is expected within a few weeks.

That view was reinforced by Ernesto Lanza, the MSRB's senior associate general counsel, who sent mixed messages to the industry at a recent gathering of 529 plan executives in Miami.

At that meeting, which was sponsored by the foundation, he acknowledged the industry's unfavorable reaction to the proposal and characterized the proposal as a "concept release" intended to spark a debate.

Mr. Lanza also expressed his support of plans by the College Savings Plans Network, a Lexington, Ky.-based association of state 529-plan officials, to retool its website to act as a clearinghouse for more-detailed information on various 529 plans.

"This would be a very helpful development to improve the quality of disclosure," he said. "Any effort to make [information about 529 plans] much more easily accessible and analyzable … will greatly inform what the board does at the meeting."

CSPN chairwoman Jackie Williams, who is executive director of the Ohio Tuition Trust Authority in Columbus, said the network's board is "moving forward" to produce a website that would satisfy the MSRB.

While a number of questions about the proposed site "still had to be answered," she said, she expected the board to resolve them "in a fairly short period of time."

While endorsing a comprehensive website to fill a void in what the MSRB once called "the decentralized nature of information sources" in the 529 market, Mr. Lanza also made it clear that the industry faces more disclosure requirements and heightened scrutiny.

He acknowledged that the MSRB's proposal to require brokers to undertake a comparative suitability analysis of in-state and out-of-state 529 plans represents "a clear departure from the standard suitability obligation in the marketplace."

That hasn't gone unnoticed by Michael Koffler, a lawyer with Sutherland Asbill & Brennan LLP in Washington. "Are regulators on the path of effectively raising [current suitability] standards to a fiduciary standard, which is a much higher standard?" he asked.


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