Regulator says Chase and Metlife failed to provide enough guidance to reps. Securities-industry watchdog NASD has fined Chase Investment Services and MetLife Securities $500,000 apiece for inadequately supervising sales of 529 college savings plans.

A 529 college savings plan is a tax-advantaged investment that helps families defray the costs of higher education. Every state except Wyoming offers 529 plans, and many states also offer matching tax incentives to accompany them.

The industry-run regulator has also ordered the companies to compensate investors "disadvantaged by [these] supervisory failure," according to a NASD press release. Chase will pay about $288,500 into approximately 300 customer accounts; MetLife will pay put $376,000 into a similar number of accounts.

Although many high-net-worth investors fund 529s for their children, grandchildren and other relatives, some private-client advisors say that ultra-high-net-worth individuals are frequently better off paying post-secondary schooling expenses out of pocket and using gifting set-asides to fund more dynamic instruments to transfer assets to heirs and other beneficiaries.

Relevant factors

NASD says that Chase and MetLife failed to have specific procedures in place for selling 529s -- Chase from January 2002 through August 2004; Metlife from January 2002 until March 2005 -- even though Chase's 529 sales for the period exceeded $134 million and Metlife's came to more than $150 million.

The trouble, says NASD, is that the companies made these sales "without providing specific criteria or guidance for their registered representatives to use when recommending 529 plan purchases," nor did they "establish criteria for supervisors to use when reviewing 529 plans recommended by their registered representatives" or "establish effective procedures concerning documenting the suitability of determinations that were made."

"Firms must take steps to ensure that investors are aware of the critical features of the many different 529 Plans that are being offered today, so investors are better able to choose a plan that's right for them," says NASD's head of enforcement James Shorris. "Brokers must consider all relevant factors -- including possible state-tax benefits, investment choices and expenses, and more -- in determining whether a 529 plan is a suitable investment for a particular customer."

The enforcement actions against Chase and Metlife are the second and third cases stemming from NASD's industry-wide examination of sales procedures around 529s. In October 2005, NASD fined Ameriprise Financial Services $500,000 and ordered it to pay approximately $750,000 to customers.

NASD used to stand for "National Association of Securities Dealers," but several years ago the private-sector regulator re-named itself, officially and solely, as "NASD." -FWR

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