FINRA office in New York. (Photo: Ron Pechtimaldian/ALM) FINRA office in New York. (Photo: Ron Pechtimaldian/ALM)

The Financial Industry Regulatory Authority says Merrill Lynch and Raymond James will pay a combined $12 million in restitution to clients due to excess 529 college savings plan fees and their failure to supervise share-class recommendations for the plans. 

Merrill Lynch agreed to pay some $4 million tied to the sale of Class C shares to 529 plan accounts with young beneficiaries. Raymond James’ independent-advisor channel is paying roughly $4.2 million, and its employee-advisor channel will pay about $3.8 million.

These matters concern issues that came before FINRA’s 529 Plan Share Class Initiative, which was announced earlier this year; this action encouraged member firms to voluntarily self-report potential violations relating to 529 plans by April 1.

“FINRA member firms must be cognizant of all costs to their customers when recommending a product. This is particularly important where an unsuitable recommendation may cause customers to incur higher fees year-after-year, especially in the case of young beneficiaries,” said Jessica Hopper, senior vice president and acting head of FINRA’s Department of Enforcement, in a statement on Wednesday.

The regulator says Merrill and Raymond James neither admitted nor denied the charges and also cooperated with FINRA to resolve the matter. 

529 Plan Share Classes

Since 529 plans are tax-advantaged municipal securities, their sale is governed by the rules of the Municipal Securities Rulemaking Board. They typically have Class A shares with front-end sales charges and lower annual fees or Class C shares with no front-end sales charge and higher annual fees. 

“Because Class C shares may be more expensive over extended holding periods, Class A shares are frequently a more suitable option for accounts with younger beneficiaries and longer investment horizons (and/or accounts that qualify for breakpoint discounts),” according to FINRA.

Both Merrill and Raymond James “failed to ensure that registered representatives considered the various fee structures when making 529 plan recommendations,” the regulatory group said.

The broker-dealers also did not set up and maintain systems and written procedures to supervise recommendations of 529 share classes that, for instance, required advisors or supervisors to evaluate beneficiary age and the number of years until expected withdrawals when making share-class recommendations.

This is related to a matter that Merrill self-reported to FINRA in June 2015,” the wirehouse said in a statement. “Even prior to FINRA’s involvement, Merrill implemented corrective measures, including enhanced policies and procedures to ensure clients receive the most appropriate shares in their accounts.”

For its part, Raymond James explained that it “agreed to a settlement where it will credit current and former eligible clients, including interest” as part of an industrywide review of share class selection in 529 savings plans and related supervision.

“The firm’s policies and processes were previously enhanced to address the issues in FINRA’s findings, and the remediation costs have been fully reserved. The firm is pleased to have resolved this matter,” it explained in a statement.

— Check out Best & Worst 529 College Savings Plans of 2019: Morningstar on ThinkAdvisor.