SEC's compliance alert summarizes 529 exam findings

The SEC's inaugural "Compliance Alert" letter to chief compliance officers includes a summary of findings in SEC examinations of broker-dealers and their sale of 529 plan interests. The applicable section of the letter states the following:

"During examinations of broker-dealers that sold 529 College Savings Plans to retail investors, examiners found that many firms appeared to lack adequate written supervisory procedures or supervisory processes to review the 529 Plan transactions and customer accounts.6 For example, in many instances, there was little or no evidence that supervisory principals had performed a supervisory review of the suitability of recommendations to customers with respect to 529 Plans, the underlying investments in the account, and the expected duration of the investment. In addition, the manner in which the broker-dealer created or maintained its records did not facilitate supervision, including review of transactions. For example, at many firms, many 529 Plan transactions were not entered into any computer system. Consequently, those transactions did not appear on the broker-dealers' trade blotters and bypassed most exception reports. As a result, those transactions bypassed crucial aspects of the firms' supervisory systems and procedures.

"Examiners found that most 529 Plans sold by the firms examined were sold to out-of-state residents. As investors who purchase an out-of-state 529 Plan may not receive some or all of the state tax benefits or may be subject to certain state income tax penalties, the tax treatment of purchasing out-of-state plans may be relevant to a suitability inquiry. Examiners did find that disclosure provided to investors in 529 Plans appeared to meet legal requirements.

"Finally, it did not appear that firms had incorporated training for registered representatives or supervisors with respect to the specific factors that could impact the suitability of the firms' recommendations with respect to 529 Plans."
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