NASD said in its announcement that this is the first enforcement action resulting from its sweeping examination of the sales of 529 college savings plans. NASD noted that federal tax advantages exist for all 529 plans, but also 26 states and the District of Columbia offer tax incentives as well. The findings against Ameriprise concerned the consideration of state tax advantages when selecting the appropriate plan for customers.
During the period from May 2001 to October 2003, Ameriprise sold only one 529 plan – sponsored by the state of Wisconsin. Approximately 32% of its sales, over $200 million, were to customers who lived in one of the tax-advantaged 529 plan jurisdictions, according to NASD. 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 states. As a result, those Ameriprise customers did not receive state income tax benefits available to them.
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. Specifically, Ameriprise did not have adequate procedures in place to take state income tax benefits into account when determining the suitability of 529 sales. They did not require 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.
In addition to the $500,000 fine, NASD ordered Ameriprise to pay around $750,000 to compensate more than 500 client accounts. The company neither admitted nor denied the allegations, but consented to NASD findings.