Ameriprise Financial Services Inc. of Minneapolis must pay about $750,000 to investors who were sold an out-of-state college savings plan that cost them valuable income tax breaks from their home states, the NASD announced yesterday.
It is the first enforcement action that NASD, the self-regulating arm of the securities industry, has taken regarding the sale of college savings plans since it launched an investigation two years ago.
The $750,000 will be paid to owners of more than 500 accounts. The NASD also ordered Ameriprise, which recently changed its name from American Express Financial Advisors, to pay a $500,000 fine for not adequately supervising the sale of college savings plans.
The tax-friendly plans have become an immensely popular way of saving for college in recent years, with assets reaching $59.1 billion at the end of June, according to the Financial Research Corp. in Boston. Families can invest in a plan's mutual funds and, if they use the money for college, they do not pay federal tax on the gains.
The plans are sponsored by states, and virtually every state has one. About half the states, including Maryland, offer residents a state income-tax deduction on all or part of their contributions to their home-state plans.
These state tax breaks are at the heart of the complaint against Ameri- prise.
Ameriprise sold only the Wisconsin college savings plan from May 2001 to October 2003. But the firm didn't have adequate procedures for brokers to determine whether the plan was suitable for out-of-state investors in light of tax breaks they could receive from their home-state plan, the NASD said.
More than $200 million that flowed into the Wisconsin plan during those 2 1/2 years came from nonresidents who lost tax deductions by not investing at home, the NASD said.
Many of those affected live in Illinois, Colorado, New Mexico, South Carolina and West Virginia, where residents can deduct their full contributions to a home-state plan on state tax returns.
Even after Ameriprise revised some of its sales procedures two years ago, brokers still lacked adequate guidance, the NASD said.
In its settlement with the NASD, Ameriprise neither admitted or denied the allegations. Spokesman David Kanihan said, "We are pleased to resolve this matter, and we are confident that our policies and procedures in this area are aligned with our clients' interests." Ameriprise now offers nine college savings plans.
At one point, the NASD was looking at the sales practices of about 20 firms, including whether some were steering investors into plans that generated the highest fees and commissions. "Far fewer than 20" are still under scrutiny, and the NASD hasn't determined whether there will be more enforcement actions, said Barry Goldsmith, executive vice president of enforcement. Since the publicity over the NASD investigation and investor alerts on college plans, investment firms have improved their marketing and sales practices, Goldsmith said.