The NASD said on Monday that it has fined two brokerage firms—Chase Investment Services and MetLife Securities—for failing to establish internal controls to supervise the sale of 529 college savings plans. The two firms were fined $500,000 apiece and ordered to reimburse customers who were affected by their supervisory failures.
Under the terms of their agreements, Chase, will pay roughly $288,500 into 300 customer accounts and MetLife will pay approximately $376,000 into about 300 of its accounts. According to the settlement, the NASD found that from January 2002 through August 2004 for Chase and from January 2002 through March 2005 for MetLife, neither firm had specific suitability procedures in place for selling 529 plans. Chase and MetLife neither admitted nor denied any wrongdoing.
During the relevant periods, Chase netted $134 million in sales while MetLife took in more than $150 million. Both firms made these sales without providing its reps any guidance for recommending 529 plans to their clients, the NASD said. Further, neither firm established criteria by which supervisors could judge the merits of a broker’s recommendation, nor did they maintain any written documentation of why the product made sense for a particular client.
Regulators say that registered reps aren’t explaining to clients that they may qualify for state income-tax benefits by investing in their home state’s plan. “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,” said James Shorris, head of NASD enforcement, in a prepared statement. “And brokers must disclose those relevant factors in the outcome,” he added.The enforcement actions mark the second and third cases to come out of the NASD’s sweep exam of broker-sold 529 plans. In October 2005, Ameriprise Financial was hit with a $500,000 fine and ordered to reimburse customers to the tune of $750,000.