Municipal securities regulators this week provided previews of upcoming regulatory action that suggest that one issue of concern to Section 529 college savings programs will fade away while another one may appear on the horizon.
In Valentine's Day testimony for the Senate Banking Committee, SEC Chairman Elisse Walter provided what may be the nail in the coffin regarding the SEC's suggestion in proposed regulations issued in 2010 that appointed board members of municipal issuers, including state issuers of Section 529 program municipal fund securities, might be obligated to register as municipal advisors. After receiving a proliferation of comment letters from state issuers and their associations, the SEC has gradually retreated from that controversial position. Chairman Walter's testimony confirms that the final regulations will contain a registration exception for appointed as well as elected board members of public sector issuers. http://www.publicfinancematters.com/2013/02/sec-comforts-appointed-board-members-of-municipal-issuers-on-valentines-day/
On another front, recent surveys by FRC (a division of Strategic Insight) regarding sales of Section 529 program investments received attention in the Section 529 community this week, including from an MSRB representative whose pronouncements were less warmly received than Commisioner Walter's. The surveys indicate that approximately 60% of brokers and financial advisors discourage their customers from purchasing Section 529 securities through the applicable broker/advisor and encourage such customers to purchase no-load shares directly from a Section 529 program offering such shares. This conduct is motivated by a variety of considerations, including that no-load shares in one Section 529 program may outperform, due to their lower expenses, advisor-sold shares in a different (or the same) Section 529 program, as well as the potential availability of state tax advantages if the no-load shares are offered by a Section 529 program sponsored by the state in which the purchaser resides.
The prioritization by a healthy majority of brokers of the customer’s financial interest over the broker’s short-term interest in a sales commission is heartwarming news. But such brokers may well think that no good deed goes unpunished. At a College Savings Foundation conference earlier this week, a MSRB representative stated that this trend may motivate the MSRB to issue guidance to the effect that such broker conduct might involve a “recommendation” by the applicable broker that would implicate MSRB Rule G-19’s suitability determination requirements and supervisory procedures.
Alarm bells have started to ring, both from brokers regulated by the MSRB and to some extent from state sponsors of Section 529 programs that fear that regulation of such non-sales by brokers may motivate some brokers to steer clear of Section 529 programs entirely.
However, what constitutes a “recommendation” is a highly fact-based determination, and what constitutes a recommendation of a particular security is a particularly complicated question in the context of Section 529 programs, which offer multiple investment choices involving a variety of asset classes. If the MSRB does eventually issue guidance on this point, experience suggests it will be nuanced and responsive to industry input, and that it will remain feasible for a broker to advise a customer against purchasing a Section 529 security through that broker given the availability of no-load direct-sold 529 program shares without triggering suitability review, provided the emphasis is placed on the generic benefit of lower expenses versus the particular virtues of a particular Section 529 program investment.
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In this newsletter, we provide a snapshot of the principal European, US and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
On July 30, 2014, The Financial Crimes Enforcement Network Issued A Notice Of Proposed Rulemaking To Clarify And Strengthen Customer Due Diligence Requirements As A Fifth Pillar Under The Bank Secrecy Act For Banks And Other Covered Financial Institutions.