Finra is backing off controversial remarks made by one of its officials regarding the sale of Section 529 college savings plans — comments that caused confusion and consternation.
According to Financial Industry Regulatory Authority Inc. spokeswoman Nancy Condon, Andrew A. Favret, a Finra regional chief counsel based in New Orleans, “misspoke.” His remarks were made in the context of a freewheeling give-and-take discussion and were “misunderstood,” she said.
At a Finra compliance meeting in Fort Lauderdale, Fla., this month, Mr. Favret told brokerage executives that it is a registered representative's responsibility to watch over money managers with funds in 529 plans.
CONSTANT MONITORING?
What sent shivers through the 529 industry was his implication that broker-dealers must constantly monitor how and when money managers of target date funds used in 529 plans shift their asset allocations.
Reps should determine whether target date funds, more commonly called age-based funds in 529 plans, are “shifting their allocations fast enough to meet the desired time frame” of when a student is going to college, he told brokerage executives.
New York- and Washington-based Finra's position about a brokerage firm's obligations when selling such plans hasn't changed, Ms. Condon said.
Guidance on what Finra requires of firms that sell 529s is made clear on the organization's website, she added.
“There should be no question about what a firm's obligations are. Nothing has changed,” Ms. Condon said.
But confusion and concern were evident following the initial reporting of Mr. Favret's remarks last week.
“529s are not a huge revenue producer, and if regulatory scrutiny was heightened, advisers and brokers may look at them and say, "it's not worth the headache,'” said Pete Bush, a certified financial planner for Horizon Wealth Management LLC, a Baton Rouge, La., firm with about $175 million in assets under management.
Joe Hurley, president and chief executive of Pittsford, N.Y.-based Savingforcollege.com LLC, agrees.
Increased regulatory obligations is “another excuse not to sell 529s,” he said.
MORE RESEARCH
“Anytime a regulator tells broker-dealers to be wary, it's going to dampen sales; that's just the nature of the beast,” Mr. Hurley said.
Section 529 plan industry officials are particularly concerned about the possibility that Finra is asking registered reps to do more work.
“To suggest that broker-dealers do their own research for target date funds or age-based funds puts a burden on them that's unnecessary,” said Peter Mazareas, chief executive of Nahant, Mass.-based Strategic Advancement Group Inc. and vice chairman of the Washington-based College Savings Foundation, an industry advocacy organization.
He noted that age-based portfolios often are made up of a number of different funds with different allocations and timetables.
To monitor the asset flows of the funds closely is “beyond the capacity of the average broker-dealer,” Mr. Mazareas said.
Overseeing the performance of funds in 529 plans should be “left in the hands of state officials,” he said.
However, pressure to evaluate target date and age-based funds carefully has grown in the wake of poor performance over the past year.
Last month, at the urging of members of Congress, the Department of Labor and the Securities and Exchange Commission held hearings to look into target date funds' wide range of performance and to consider possible regulation.
Finra's backing off the issue in terms of stricter standards for 529 sales led to a collective sigh of relief in the industry, which is already beset with declining assets as well as bad publicity and lawsuits resulting from the disastrous performance of New York-based OppenheimerFunds Inc.'s Core Bond Fund. That fund lost 36% last year after being billed as a conservative fund in 529 plans.
But even if Finra regulations for age-based funds aren't heightened, registered reps or advisers who sell 529 plans with an age-based fund need to do their homework and spend time with their client, state administrators of 529 programs said.
“Broker-dealers need to do a suitability assessment for their clients and feel comfortable with the glide path of any age-based option that they recommend,” said Joan Marshall, executive director of the Baltimore-based College Savings Plans of Maryland and spokeswoman for the Lexington, Ky.-based College Savings Plans Network, the industry organization for state 529 plan administrators.
Mr. Favret's comments were interpreted by Mary G. Morris, the Richmond, Va.-based executive director of the Virginia College Savings Plan, as “cautioning folks to do what they should be doing already.”
“You have to determine what's appropriate for the client. That's not anything new,” Ms. Morris said.
“How quickly assets are shifted isn't the issue,” she said. “The issue is: Where is your client now, and where do they need to be at given point in the future?”
CREATING THEIR OWN
In fact, Ms. Morris added, broker-dealers and advisers can create their own age-based portfolios for clients using different funds at different points in time.
Tom Orecchio, principal of Modera Wealth Management in Old Tappan, N.J., which has about $450 million in assets under management, said that that is exactly what he is doing.
“We create our own age-based portfolio for a child in a 529 plan using different funds. If we become uncomfortable with one, we can dial it down, and we ultimately get to the mix and risk level in the plan that's best for the client,” said Mr. Orecchio, who is a past chairman of the National Association of Personal Financial Advisors of Arlington Heights, Ill.
“I can't see how advisers can tell money managers what to do, but they can mix and mingle funds for a 529 client and manage those on an ongoing basis,” Mr. Bush said.
Ms. Condon noted that 529 plans are regulated under the rules of the Municipal Securities Rulemaking Board of Alexandria, Va., and said that a compliance checklist for selling such plans under those rules can be found on Finra's website.
E-mail Charles Paikert at [email protected], and e-mail Bruce Kelly at [email protected].
