As part of a recent initiative to improve compliance with rules governing share-class recommendations of 529 savings plans and related compensation, Morgan Stanley agreed to pay about $1.7 million in restitution and interest to clients who incurred excess fees in their college savings accounts, the Financial Industry Regulatory Authority said Wednesday.
FINRA explained that the wirehouse’s supervisory system “was not reasonably designed to supervise 529 plan share-class recommendations executed in certain legacy accounts or transactions made directly with 529 plans.”
Morgan Stanley’s supervisory system for 529 plan recommendations involved “grids,” which were part of its order entry systems, to identify an appropriate share-class selection, the regulatory group said.
However, the wirehouse didn’t integrate the grids with some legacy account systems until 2016, “and it did not have a process to check that the grids were applied to transactions made directly with 529 plans,” FINRA added.
“We are pleased to have resolved this matter,” a spokesperson for Morgan Stanley said in a statement.
FINRA’s self-reporting 529 plan share class program included over $2.7 million in total restitution and interest paid to clients of some 3,900 accounts. They payments arose from settlements with Morgan Stanley and B. Riley Wealth Management, as well as from 17 matters resolved through cautionary action letters.
The news comes about a year Merrill Lynch and Raymond James paid a combined $12 million in restitution to clients due to excess 529 plan fees and their failure to supervise share-class recommendations for the plans. These matters were resolved before FINRA launched its 529 Plan Share Class Initiative, in which it encouraged member firms to voluntarily self-report potential violations.
In settling the recent 529-fee matters, Morgan Stanley and B. Riley did not admit or deny the charges, though they consented to the entry of FINRA’s findings. FINRA recognized the two firms for their cooperation and did not fine them.
“The purpose of the 529 initiative is to remedy potential supervisory and suitability violations related to 529 plan share-class recommendations, and to return money to harmed investors as quickly and efficiently as possible,” said Jessica Hopper, head of FINRA’s Department of Enforcement.
“We are very pleased with the substantial progress made thus far, are encouraged by the level of cooperation of member firms that self-reported, and expect to resolve the remaining matters in the coming year,” Hopper added.