Industry regulators have fined Bank of America Corp.'s Merrill Lynch unit $500,000 because of oversight failures involving sales of college-savings products called 529 plans. The Financial Industry Regulatory Authority -- the securities industry's self-policing organization -- also censured Merrill Lynch in a disciplinary action disclosed Tuesday. FINRA found that Merrill Lynch failed to maintain adequate supervisory procedures to ensure that its representatives were considering the potential tax benefits of recommending a client choose a 529 plan in the state where they live, rather than advising a customer select an out-of-state plan.
The plans allow money to be withdrawn for college expenses free of federal taxes. Each plan is sponsored by a state which can set its own guidelines. Many states also offer state tax deductions or credits to residents. However, depending on where the investor lives, an out-of-state plan may offer lower fees or other advantages that offset any home-state tax benefits.
From June 2002 through February 2007, Merrill Lynch sold over $3 billion in 529 plans, and required its representatives to consider potential state tax benefits among the factors to determine whether to recommend an out-of-state plan to a customer.
However, Merrill Lynch failed to maintain systems and procedures to ensure that representatives were adequately considering those benefits in their analyses, FINRA said.
529 plans are considered municipal securities, subject to industry rules governing their sales.
Under the agreement with FINRA, Merrill Lynch did not admit to or deny the organization's findings.
Merrill Lynch spokesman Bill Halldin said Merrill Lynch took steps several years ago to ensure that employees were documenting their discussions of tax considerations with clients.
During the period covered by the agreement with FINRA, Maine's NextGen College Investing Plan was the only 529 that Merrill Lynch offered and sold on a nationwide basis.
The agreement requires Merrill Lynch to write letters to customers who lived in other states offering 529-related tax benefits, but instead opened Maine's NextGen plan accounts at Merrill Lynch. The letters are supposed to instruct those customers to call a phone number at Merrill Lynch, where they can ask questions or express any concerns or complaints they have. If customers request such a move, Merrill Lynch is supposed to help transfer or roll over any investment in the NextGen plan into a home-state 529, and waive certain fees.