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FINRA to Issue FAQ on 529 Share Class Initiative, May Extend Compliance Dates

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The Financial Industry Regulatory Authority plans to issue a FAQ on its 529 Plan Share Class Initiative and may also extend the compliance dates for the self-reporting program, according to Susan Schroeder, FINRA’s enforcement chief.

“We’re working on a FAQ document, because we have gotten a lot of questions in, that we’ll be looking to put out in the short term,” Schroeder said during a Wednesday FINRA video update to firms. “We’ll also be thinking about whether or not we need to push the dates out because people have had a lot of questions about how to engage in the initiative.”

As it stands now, to be eligible for the initiative, broker-dealers must self-report 529 plan share class violations by April 1, with May 3 being the deadline for a firm to submit requested information covering the disclosure period, January 2013 through June 2018.

FINRA launched the program on Jan. 28, explaining in Regulatory Notice 19-04 that over the past several years, some firms have failed to reasonably supervise brokers’ recommendations of multi-share class products.

As Schroeder explained in the podcast, FINRA is asking firms “to conduct a qualitative assessment of their supervisory systems and procedures.”

In Reg Notice 19-04, “we discuss some of the supervisory issues we’ve seen in ongoing exams and investigations. So we’re encouraging firms to check and see whether they have some of the same issues. Things like not reviewing data around what share class the firm is recommending or not providing any training so that brokers are unable to explain the impact of a share class recommendation.”

FINRA, she continued, is “looking to firms to conduct a qualitative assessment, not a quantitative analysis. That’s the first step. Firms might want to do some risk-based analysis of transactions as a way to test their supervision,” she added, but that’s not required.

Noting that the initiative is a “voluntary program,” Schroeder explained that FINRA launched the program “to provide this information for firms because we see there is a problem out there that doesn’t seem to be isolated, so it might be more widespread.”

Providing the information to broker-dealers “gives them an opportunity to do the assessment and then work with us to get money back to customers quickly. In return, we would not fine the firm.”

However, she continued, “if a firm doesn’t engage in this initiative and let’s say down the road FINRA examines the firm and identifies supervisory issues in their 529 sales, there wouldn’t be a penalty attached to that for not self-reporting. We would go through the normal course; there may be a fine and an enforcement action, but it would be the same kind of fine and enforcement action that would have occurred had there never been an initiative.”

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