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FINRA Orders Advisor Group, LPL, MML, UBS, Wells Fargo to Pay $9.5M Over 529 Plans

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What You Need to Know

  • The firms allegedly failed to supervise reps’ 529 plan recommendations.
  • Advisor Group must pay restitution of $485,441, while LPL must pay $1.2 million and Wells Fargo $3.3 million, plus interest.
  • Because the firms cooperated with FINRA, they were not fined.

The Financial Industry Regulatory Authority has ordered three Advisor Group divisions, LPL Financial, MassMutual division MML Investor Services, UBS, and two divisions of Wells Fargo to pay a total of $9.5 million in restitution to clients affected by the firms’ alleged failures to establish and maintain supervisory systems reasonably designed to supervise their reps’ recommendations about 529 tax-advantaged education savings plans.

“LPL takes our supervisory obligations seriously,” a company spokeswoman told ThinkAdvisor on Tuesday. “We have fully cooperated with FINRA throughout this industry-wide self-reporting initiative and have implemented new policies, procedures, and training to strengthen our capabilities related to this important work.”

From January 2013 to March 2020, LPL allegedly failed to establish and maintain a supervisory system reasonably designed to supervise registered representatives’ recommendations to clients that they roll over 529 plan investments from one state plan to another, according to a FINRA letter of acceptance, waiver and consent that Robert Pettman, LPL executive vice president-wealth management, signed Oct. 8.

“Specifically, LPL did not have policies, procedures or training regarding available sales charge waivers or special share classes that decreased the cost of 529 plan rollover transactions,” according to the letter. “As a result of the foregoing, LPL violated MSRB Rule G-27.”

LPL voluntarily self-reported potential issues with its supervisory system to FINRA as part of the broker-dealer self-regulating group’s 529 Plan Share Class Initiative announced in Regulatory Notice 19-04 and proposed a plan to remediate affected clients, according to FINRA.

Therefore, although the AWC letter includes an order for LPL to pay restitution plus interest of $1.2 million to owners of 1,941 accounts and a censure, the firm has not been fined, FINRA pointed out.

Advisor Group’s Violations

From Jan. 1, 2013, through June 30, 2018, Royal Alliance, SagePoint Financial and FSC “failed to establish and maintain a supervisory system reasonably designed to supervise 529 plan share-class recommendations in violation of MSRB Rule G-27,” according to the AWC letter executives at the three Advisor Group divisions signed Oct. 29.

The three Advisor Group divisions shared written supervisory procedures that “did not reasonably address the share-class suitability factors specific to 529 plan investments,” according to FINRA.

Their transaction review systems were also “not reasonably designed to identify 529 plan share-class recommendations that were inconsistent with the investment time horizon suggested by the age of the account beneficiary,” FINRA said.

The three divisions “voluntarily self-reported potential issues with their supervisory system to FINRA as part of the 529 Plan Share Class Initiative … and proposed a plan to remediate affected” clients, according to FINRA.

Therefore, although the AWC letter includes a censure for each division and orders of restitution and estimated interest totaling $485,441, FINRA has not fined them, it noted.

SagePoint, however, was separately fined $700,000 by FINRA for allegedly failing to establish and maintain a supervisory system, including written supervisory procedures reasonably designed to supervise reps with histories of industry and regulatory-related misconduct, according to an AWC letter signed by FINRA on Friday. SagePoint accepted and consented to FINRA’s findings without admitting or denying those findings.

Advisor Group did not immediately respond to a request for comment about the 529 Plan sanctions.

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Wells Fargo’s Violations

Between Jan. 1, 2011, and Dec. 4, 2016, Wells Fargo Advisors and Wells Fargo Advisors Financial Network “failed to establish and maintain a supervisory system reasonably designed to supervise representatives’ 529 plan share-class recommendations in violation of MSRB Rule G-27,” according to the AWC letter that Jim Hays, president of the divisions, signed Dec. 3.

The divisions shared written supervisory procedures that “did not reasonably address the share-class suitability factors specific to 529 plan investments,” according to FINRA.

Their transaction review systems were also “not reasonably designed to identify 529 share-class recommendations that were inconsistent with the investment time horizon suggested by the age of the account beneficiary,” the AWC letter said.

FINRA credited the Wells Fargo divisions for their cooperation. Therefore, although the AWC includes an order that they pay restitution of about $3.3 million plus interest and a censure, no fine has been imposed on them, according to FINRA.

“Wells Fargo Advisors is pleased to have resolved this matter,” company spokeswoman Jackie Knolhoff told ThinkAdvisor on Tuesday. “We enhanced our supervisory policies related to 529 share class recommendations and are making payments to clients, with interest, related to share class fees.”

UBS’s Violations

From Jan. 1, 2013 through June 30, 2018, UBS “failed to establish and maintain a supervisory system reasonably designed to supervise 529 plan share-class recommendations in violation of MSRB Rule G-27,” according to FINRA.

Specifically, the firm “did not subject initial 529 plan recommendations at account opening to the supervisory controls on its order entry platform,” FINRA alleged. “Instead, all new 529 plan accounts were opened directly with plans and then linked to the UBS platform. At that point, the firm applied its mutual fund share-class suitability controls to subsequent 529 plan recommendations. However, those controls were not tailored to 529 plans.”

FINRA credited UBS for its cooperation. Therefore, although the AWC includes an order that the firm pay restitution of $4.1 million plus interest and a censure, no fine has been imposed on UBS, according to FINRA.

“We are pleased to have resolved this matter,” a USB spokesperson said on Wednesday.

MML’s Violations

“From January 2013 to March 2017, MML failed to reasonably supervise registered representatives’ recommendations to customers to purchase particular share classes of 529 savings plans,” according to FINRA.

MML didn’t provide adequate guidance to reps regarding “share-class suitability factors specific to 529 plan investments when recommending 529 plans and did not provide supervisors with the information necessary to properly evaluate the suitability of 529 share-class recommendations,” FINRA alleged. As a result, MML violated MSRB Rules G-27(a), (b) and (c), FINRA said.

Also, from July 2016 through October 2019, MML “failed to establish and maintain a supervisory system reasonably designed to identify customers’ contributions to mutual funds and 529 plans and determine whether those transactions qualified customers to take advantage of available breakpoint discounts,” according to FINRA. As a result, MML violated FINRA Rules 3110(a) and 2010 and MSRB Rules G-27(a) and (b), FINRA said.

FINRA credited MML for its cooperation. Therefore, although the AWC includes a censure and an order for restitution and estimated interest of $744,220, no fine was imposed on the firm, FINRA said.

“We are pleased to resolve this matter and put it behind us,” a MassMutual spokeswoman said on Wednesday.

FINRA signed all five AWC letters and posted them on its website Monday.