NASD Examining 529 Tax Disclosures

March 19, 2004 ( - The National Association of Securities Dealers (NASD) is investigating six large securities firms to see whether they sold 529 plan accounts to college savers without properly informing the investors of their potential tax burdens.

The NASD probe focuses on whether the firms made the 529 sales of plans sponsored by states other than their investor’s own without informing customers that they could lose state tax deductibility typically only available when saving in one’s home state 529 plan, the Wall Street Journal reported.

The “overwhelming majority” – typically more than 90% – of the 529 dollars taken in by the six firms came from nonresidents of the states sponsoring the particular plans involved, NASD Vice Chairman Mary Schapiro said. She refused to identify the six firms, the Journal said.

While there can be valid reasons for investors to opt for an out-of-state plan, “we have to look at it very closely,” she said, because “they potentially lost one of the great benefits of buying a 529 plan: state tax deductibility” of plan contributions.  Also, Schapiro said the NASD is “looking at expanding the scope of what we are doing beyond these six firms.”

The NASD apparently isn’t the only one in Washington looking at the popular college savings accounts. In a letter made public this week, US Securities and Exchange Commission (SEC) Chairman William Donaldson said aspects of these state plans, which typically use mutual funds as their primary investment option, are “complicated and likely difficult for parents to understand.” He said he has established an SEC task force to look at issues, including 529-plan disclosure and the high fees of some of the plans (See    SEC Looks at 529 Fees ).

Congress is also getting involved. US House of Representatives Financial Services Committee Chairman Michael Oxley (R-Ohio), who had requested Donaldson’s comments on 529 fees and disclosure, views the SEC task force as “a good step” and intends to hold 529 hearings, his spokeswoman, Peggy Peterson told the Journal.

Lured by their significant federal and state tax advantages, parents and grandparents have stashed large sums in 529 accounts. Across the country, the college-savings plans had more than $37 billion in assets as of last month, according to Morningstar . Income from these plans may be tax-free if used for qualified education expenses.

Well aware of drawbacks of the popular plans, some 529 fans say they welcome the new attention from Washington. “It’s about time,” says Joseph Hurley, founder and chief executive of in Pittsford, New York, noting that the complexity of 529 plans and their wide-ranging fees “were recognized as issues way back when 529 plans started” in 1997.