MSRB rules on out-of-state 529 sales go into effect
MSRB Notice 2006-23 details the customer protections that broker-dealers must now have in place. The notice applies existing Rule G-17 on fair dealing to the sale of out-of-state 529 plans by requiring that a dealer provide, or determine that the program disclosure document prominently displays, the following “additional” disclosures:
1) Depending upon the laws of the home state of the customer or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if the customer invests in the home state’s 529 college savings plan.
2) Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision.
3) The customer should consult with his or her financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to the customer’s specific circumstances and also may wish to contact his or her home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan.
MSRB Notice 2006-23 also describes how Rule G-19 on suitability applies to the sale of 529 plan interests. It emphasizes that any dealer recommending a 529 plan must undertake an “active suitability process involving a meaningful analysis.” It discards the “comparative suitability analysis,” proposed in June 2004, that drew severe criticism from the brokerage industry.
Broker-dealers are also reminded via the interpretive notice that all disclosures made to customers, regardless of whether they are made pursuant to a regulatory mandate, must not be false or misleading. In other words, a broker cannot provide inaccurate information about the customer’s home state 529 plan when recommending an out-of-state 529 plan.