The Financial Industry Regulatory Authority launched Monday a program to allow broker-dealers to self-report share class violations related to 529 plans.
The 529 Plan Share Class Initiative, as set out in Regulatory Notice 19-04, states that over the past several years, FINRA has found that some firms have failed to reasonably supervise brokers’ recommendations of multi-share class products.
As with mutual fund share class concerns, the broker-dealer self-regulator states that it has raised concerns specifically regarding firms’ supervision of share-class recommendations to customers of 529 savings plans.
Shares within 529 plans are commonly sold in different classes with differing fee structures, FINRA explains, with Class A shares typically imposing a front-end sales charge but lower annual fees compared with other classes. Class C shares typically impose no front-end sales charge but impose higher annual fees than Class A shares.
“These classes have a differing cost impact depending on the length of time the customer holds the securities,” FINRA states.
The 529 Plan Share Class Initiative is designed to “promote firms’ compliance with the rules governing 529 plan recommendations, to promptly remedy potential supervisory and suitability violations related to recommendations that customers of 529 plans buy share classes that are inconsistent with the accounts’ investment objectives, and to return money to harmed investors as quickly and efficiently as possible,” the notice states.
Susan Schroeder, head of FINRA enforcement, stated in a video message that “529 plans are incredibly important investment vehicles for a lot of Americans who are trying to save for the education of beneficiaries like their children, and FINRA has learned through the course of reviewing some firms’ 529 plan sales that this can be a blind spot for some firms.”
Schroeder added that if firms self-report via the initiative, “a settlement under this initiative would be a supervisory settlement and would not trigger” a statutory disqualification.
To encourage voluntary reporting under the initiative, FINRA’s Department of Enforcement will recommend that FINRA accept favorable settlement terms for firms that self-report these potential violations and provide FINRA with a detailed remediation plan.
To be eligible for the initiative, firms must self-report by providing written notification to FINRA Enforcement by noon on April 1.
Notification can be made by email to [email protected] or by mail.