Are we there yet?Account Processing Automation / BDAC Operational Update

Presenters:

Arthur Dunn – Boston Financial

Peter Angus – Upromise Investments, Inc.

Jim Lynch – Education Trust of Alaska

Agenda:

• Automation Overview

• Program Manager Perspective

• State Perspective

• Discussion

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Are We There Yet?

Automation Overview

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Advisor-Sold 529 Products - Current Automation

National Securities Clearing Corporation (NSCC), is a financial services industry utility connecting Broker/Dealers with the products that they sell

Current NSCC automation process was implemented in 2003 and established as Networking Level 4.

Operationally this approach means:

Partial New Account establishment automation

Provides for automation of purchases and redemptions

Networking files sent to Broker/Dealer reflecting account activity

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NSCC Enhancement Process

The Investment Company Institute (ICI) Broker Dealer Advisory Committee (BDAC) formed a 529 Task Force to advise the NSCC on enhancementopportunities for 529 processing

Enhancements are broad-ranging:

Full New Account functionality

Additional purchase and redemption transaction types

Create functionality to support rollover transactions

This sets the stage for introducing additional automation models:

Networking Level 3

Omnibus Accounts

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Additional NSCC Automation Models

Level-3 - In Networking Level 3, the broker/dealer maintains and controlsthe accounts and informs the program manager of the accounts' activity. In this environment the accounts are fully disclosed to the program manager allowing for increased linking opportunities using SSN, Account Holder name and/or common address on the program manager’s record keeping system.

Omnibus Accounts - An omnibus account is a master account representing subaccounts of multiple investors. An omnibus account is opened on the records of the program manager in the name of the intermediary. In this environment the subaccounts and their details are not disclosed to the program manager.

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Responsibility Implications of Automation Method

Books and Records Attribute or Requirement Level 4 Level 3 Omnibus

Account Holder Program Mgr Broker/Dealer Broker/Dealer

Registration Program Mgr Broker/Dealer Broker/Dealer

FA Branch / Rep Program Mgr Broker/Dealer Broker/Dealer

Statements / Confirms Program Mgr Broker/Dealer Broker/Dealer

Tax Reporting – 1099Q Program Mgr Broker/Dealer Broker/Dealer

Anti-Money Laundering / Customer Identification Program

Program Mgr /Broker/Dealer

Broker/Dealer Broker/Dealer

CDSC (Contingent Deferred Sales Charge) Program Mgr Broker/Dealer Broker/Dealer

ROA (Rights of Accumulation) Program Mgr Broker/Dealer Broker/Dealer

Age-Based Roll Program Mgr Broker/Dealer Broker/Dealer

Automatic / Systematic Investment Program Mgr Broker/Dealer Broker/Dealer

Aggregation (exchange rule, basis/earnings, max contribution)

Program Mgr /Aggregator

Program Mgr Broker/Dealer

Aggregator

Program Mgr Broker/Dealer

Aggregator

Legal Document Distribution Program Mgr Broker/Dealer Broker/Dealer6

Account Processing Automation

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Program Manager Perspective

Program Manager Perspective

Primary Responsibilities of a 529 Program Manager

Qualified 529 Plan Compliance

IRS Regulations (aggregation, etc.)

Program Structure (offering document)

Books and Records for the Program and Trust Participants

Investment Manager

Transfer Agent

Call Center

Technical Agent for the Plan (websites, etc.)

State Liaison

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Program Manager Perspective

Ongoing Responsibilities of a 529 Program Manager?

Qualified 529 Plan Compliance

IRS Regulations (aggregation, etc.)

Program Structure (offering document)

Books and Records for the Program and Trust Participants

Investment Manager

Transfer Agent

Call Center

Technical Agent for the Plan (websites, etc.)

State Liaison

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Program Manager Perspective

Significant Things for a State to Consider

How will overall Aggregation Happen (whose expense)?

Who will Insure that the Program is 529 Compliant?

Will there still need to be a Master Book and Record for the Trust? (how can the program be audited)

Plan Conversion/ Deconversion how?

Annual Investment Management Review and Fund Changes

Potential Significant Impact to 529 Pricing due to Increased Administrative Overhead

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Account Processing Automation

State Perspective

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State Perspective

Primary Responsibilities for States:

Fiduciary Duties for Section 529 Public Funds:

Undivided Loyalty to the Beneficiary

Reasonable Care

Prudent Delegation of Authority to Invest Public Funds and Related Fiduciary Activities (Due Diligence and Oversight)

Maintain Qualified Plan Status

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State Perspective

Maintaining Qualified Plan Status, Continued (subject requirement)

Must set all of the terms and conditions of the program; and

Must be actively involved on an ongoing basis in the administration of the program:

Play a substantial role in administration of the program;

Select, Supervise, Monitor, Audit, and Terminate Private Contractors;

Hold private contractors to the same standards as is done for other state funds.

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State Considerations

Does the enabling legislation provide for this level of outsourcing or delegation??

Is the level of delegation prudent??

Assuming that operational issues such as aggregation, tax reporting, share aging, etc. will be resolved, can the state effectively supervise, monitor and audit the operations at the broker dealer level??

How will the state be actively involved in the administration of the program??

What is the level of alignment of interest between the state, the program manager, and the broker/dealer??

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State Considerations

What conflicts of interest might the state, the program manager, or the broker/dealer have??

What level of transparency will be available to the state and program manager??

What program changes might be required to accommodate the broker/dealer or NSCC systems??

How will program specific marketing and promotions be handled??

How will broker/dealer marketing and promotions be monitored??

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Account Processing Automation

Discussion

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