Fund Times: NASD Fines Ameriprise (Formerly AXP)
Plus new Fidelity fund, Bill Gross speaks out, and more.
The NASD fined Ameriprise Financial Services, Inc. $500,000 for failing to properly supervise customers invested in their 529 College Savings Plan. The College Savings plans and 529s are designed to help people sock away college money for their children. However, the tax treatment of these plans varies by state. All 529 plans are exempt from federal taxes, but 26 states offer their residents additional benefits for investing in the 529 plan of their home state. In Illinois for example, investors may deduct 529 savings from their income tax.
The heart of the issue at Ameriprise comes from NASD findings from May 2001 through the end of 2004. Ameriprise sold 529 plans without considering clients' state tax needs. Specifically, Ameriprise only sold one 529 plan--a Wisconsin plan--and 32% of its sales were to customers who did not live in Wisconsin, but in five other states (New Mexico, South Carolina, Illinois, Colorado, and West Virginia). Ameriprise agents continued to sell that one Wisconsin 529 plan to customers in those five states through the end of 2004.
Ameriprise agreed to pay an additional $750,000 on top of the $500,000 fine to compensate the more than 500 accounts of customers who bought a 529 plan but reside in states other than Wisconsin and who subsequently lost some tax savings.
In all, the finding brings to question how good the controls are at other companies' 529 plans. The NASD press release says this is "the first" enforcement action they're bringing on this matter, which indicates that additional fines could be forthcoming.
New Fidelity Fund Targets Golden State Investors
Fidelity further expands its lineup and will begin offering Fidelity California Short-Intermediate Tax-Free Bond fund. The fund will invest at least 80% of its assets in bonds that are exempt from U.S. Federal and state income taxes, and it will take the Lehman Brothers California 1-7 Year Non-AMT Municipal Bond Index as its benchmark. Existing California muni-manager Douglas McGinley, who runs Fidelity California Muni Income (FCTFX), will run the new offering. The fund is expected to cost 0.67%, which ranks near the median of typical intermediate single-state muni-bond funds.
It will be interesting to see how strong the demand will be for the new fund. Vanguard CA Intermediate-Term Tax-Exempt (VCAIX) has more than $2 billion in assets, so the money could be out there for another no-load offering.
An Interest-Rate Cut in the Near Horizon?
That's what PIMCO's Bill Gross thinks could happen. According to Gross, we are due for what appears to be 2% or less GDP growth rate for 2006, a rate that may stop the U.S. Federal Reserve from further increasing rates and may induce eventual easing at some point later in the year. It may be new (starting in January 2006) Federal Reserve Chairman Ben Bernanke's first policy shift and an indicator of his willingness to address the Fed's dual mandate of inflation control and economic growth.
Another Scudder Manager Jumps Ship
Jan Faller has left Scudder/Deutsche. Although we only really knew him as manager of Scudder Strategic Income (KSTAX), he was apparently put on a lot of funds in September in a way that appeared to make him one of their fixed-income top dogs. Given the historic manager/strategy turbulence that shareholders of that fund have endured, we were pleased by the disciplined balance that he brought to the fund. Therefore, we find it troublesome that he will no longer be the fund's manager.
John Hancock to Merge High-Yield Funds
Pending shareholder approval, the tiny $24 million John Hancock High Income (JAHIX) will merge with $800 million John Hancock High-Yield (JHHBX). What's interesting is that the former fund is more of a traditional high-yield fund, whereas the latter is run in a more go-anywhere fashion, with about 17% in stocks, 10% in converts, and 70% in high-yield bonds. Shareholders of the High Income Fund should carefully study the High-Yield Fund's strategy and ensure that its volatile and often different approach to the high-yield markets still fits their objectives for high-yield exposure.
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As a longtime fan, I'm celebrating the Chicago White Sox's World Series victory. It may have taken them 88 years, but hey, even the best investments sometimes take longer to pan out than originally thought.
Dieter Bardy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.