NASD Fines Ameriprise Financial Services, Inc. $500,000 for Supervisory Violations in 529 College Savings Plan Sales
Washington, DC — NASD announced today that it has ordered Ameriprise Financial Services, Inc. of Minneapolis - formerly American Express Financial Advisors - to pay a fine of $500,000 for failing to adequately supervise the firm's sales of 529 plans. NASD also ordered the firm to pay approximately $750,000 to compensate more than 500 customer accounts disadvantaged by those supervisory failures. The conduct at issue occurred when the firm was known as American Express Financial Advisors.
The enforcement action announced today is the first to result from NASD's recent fact-finding sweep examining sales of the popular college savings plans.
529 college savings plans are tax-advantaged investment programs designed to help parents and others pay for qualified higher education costs. The plans offer families the opportunity to obtain growth and distribution of earnings that are free from federal taxes. Each of the 50 states and the District of Columbia currently offers at least one 529 plan - more than 80 plans are available in all. Federal tax advantages apply to all 529 college savings plans, while 26 states and the District of Columbia currently offer varying tax incentives as well - meaning that state tax treatment can be an important consideration for investors in deciding which plan to select. 529 plans are subject to regulation by the Municipal Securities Rulemaking Board, whose rules are enforced by NASD.
"529 college savings plans play an increasingly important role in enabling families to save for college. NASD has long been concerned that investors understand the differences between the many different 529 plans that are being offered today and choose a plan that is right for them," said NASD Vice Chairman Mary L. Schapiro. "These are complex investments, and individual investors need to consider a number of factors when choosing a 529 Plan - including its performance, investment choices, fees and expenses and its tax implications."
NASD's investigation showed that from May 2001 through the end of 2004, Ameriprise sold over $1.1 billion of 529 plans to more than 138,000 customer accounts, at a time when the firm's supervision of 529 sales was inadequate. NASD found that the firm's procedures during this period were not reasonably designed to achieve compliance with suitability obligations in the sale of 529 plans. In fact, from May 2001 until October 2003, when the firm sold over $625 million of 529 plans, most of the firm's procedures for sale of 529 plans were simply general compliance requirements relating to the sale of all products offered by Ameriprise. Although Ameriprise did adopt certain procedures in October 2003 relating specifically to the sale of 529 plans, NASD found that those procedures were not adequate to address the firm's suitability obligations.
During the period May 2001 through October 2003, approximately half of the states offered state tax benefits to residents who purchased an in-state plan. During the same period, however, NASD found that Ameriprise offered and sold only one 529 plan — a plan sponsored by the state of Wisconsin. Approximately 32 percent of its sales - over $200 million - were to customers who lived in one of the tax-advantaged 529 plan jurisdictions. Investors in five of those states (New Mexico, South Carolina, Illinois, Colorado and West Virginia) could have received unlimited state income tax deductions for investments in their home state's 529 plans. Yet, through the end of 2004, Ameriprise sold over $55 million in the Wisconsin 529 plan to customers residing in those five states. As a result, those Ameriprise customers purchasing the Wisconsin plan who lived in one of the tax-advantaged states did not receive state income tax benefits available to purchasers of 529 plans.
These 529 plan sales occurred at a time when Ameriprise did not have adequate procedures in place to take state income tax benefits into account when determining the suitability of 529 sales. Among other things, Ameriprise did not have procedures requiring that registered representatives consider the state income tax benefit that might be obtained by purchasing an in-state plan and weigh that benefit against other benefits that might be provided by a recommended out-of-state plan, such as investment performance, investment choices, fees and expenses, or other factors. Even when the firm revised its 529 procedures, as it did in October of 2003, they contained no procedures or guidance to assist their brokers in making a suitability determination.
In addition to fining Ameriprise $500,000, NASD ordered the firm to pay approximately $750,000 to compensate more than 500 accounts where customers purchased a 529 plan sponsored by a state other than the customer's state of residence and experienced substantial lost tax benefits.
In settling with NASD, Ameriprise neither admitted nor denied the allegations, but consented to the entry of NASD's findings.
To help investors learn about the risks and rewards of 529 Plan investing, NASD offers two valuable online tools - an Investor Alert, College Savings Plans - School Yourself Before You Invest, and a comprehensive online learning center, Smart Saving For College, which includes a 529 Plan Expense Analyzer to help investors calculate and compare the fees and expenses for competing 529 Plans.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches and request almost 190,000 reports for existing brokers or firms. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our website at www.nasd.com.