FINRA Focuses on Self-Reporting Violations in 529 Plan Share Class Initiative

The Financial Industry Regulatory Authority (“FINRA”) has implemented a 529 Plan Share Class Initiative (“529 Initiative”) to promote member firms’ compliance with the rules governing recommendations of 529 savings plans (“529 plans”).  The 529 Initiative is structured for member firms to self-report potential supervisory and suitability violations.  These violations relate directly to recommendations made to customers of 529 plans to buy share classes that were inconsistent with the accounts’ investment objectives.  The 529 Initiative also integrates the requirement that member firms subsequently return money to harmed investors as quickly and efficiently as possible.

FINRA Supervisory Concerns

Over the past several years, FINRA has found that some member firms have failed to reasonably supervise brokers’ recommendations of multi-share class products. As a result, FINRA is concerned that because of the unique features of 529 plans, some member firms may not have provided adequate supervision of the sale of such products.  For example, 529 plan transactional data, including account asset levels, may not be available in the systems that firms use to monitor other types of transactions. This initiative is intended to encourage firms to assess their supervisory systems and procedures governing 529 plan share-class recommendations, to identify and remediate any defects, and to compensate any investors harmed by supervisory failures.

 The Initiative

 In order to encourage voluntary reporting under the 529 Initiative, Regulatory Notice 19-04 has noted that FINRA’s Department of Enforcement (“Enforcement”) will recommend that FINRA accept favorable settlement terms for member firms that self-report these potential violations provided they provide FINRA with detailed information, including a detailed remediation plan.  The Notice also sets up issues the member firms should consider and information to be provided to FINRA, which are summarized below:

Who Should Consider Self-reporting?

          FINRA encourages member firms to review their supervisory systems and procedures governing 529 plan share-class recommendations and self-report to FINRA areas where their supervision may not have been reasonable. Potential areas of concern include the failure to:

  • provide training regarding the costs and benefits of different 529 plan share classes;
  • understand and assess the different costs of share classes for individual transactions;
  • receive or review data reflecting 529 plan share classes sold; and
  • review share-class information, including potential breakpoint discounts or sales charge waivers when reviewing the suitability of 529 plan recommendations.

When and What Firms Should Self-report?

          To be eligible for the 529 Initiative, member firms must self-report by providing written notification to FINRA Enforcement by April 1, 2019.  A firm that has timely self-reported must, by May 3, 2019, confirm its eligibility for the 529 Plan Share Class Initiative by submitting all of the required information set out in the Notice, for the period of January 2013 through June 2018 (the “disclosure period”).

Standardized Settlement Terms

         To the extent that a member firm meets the requirements of the 529 Initiative, and Enforcement decides to recommend a formal enforcement action based on the facts disclosed by the firm through the 529 Initiative and any other relevant information, Enforcement will recommend that FINRA accept a settlement that includes restitution for the impact on affected customers and a censure, but no fine.  Recommended settlements also will include either an acknowledgement that the firm has voluntarily taken corrective actions or an undertaking to do so.  Enforcement anticipates that settlements entered into pursuant to this 529 Initiative will include charges under MSRB Rule G-27 (Supervision).

It is important to note that settlements under this rule would not result in a member firm’s being “statutorily disqualified” for purposes of the Securities Exchange Act of 1934.

No Assurances for Firms That Do Not Self-Report

          In 2019, FINRA will continue to examine and investigate firms’ supervision of share-class recommendations to customers of 529 plans. If a member firm does not self-report under the 529 Initiative and FINRA later identifies supervisory failures by that firm, any resulting disciplinary action likely will result in the recommendation of sanctions beyond those described under the initiative.

Issues Related to the 529 Initiative

There are two major issues member firms utilizing the 529 Initiative need to be aware of.  First, failure to provide all of the required information to FINRA by May 3, 2019 will result in a loss of eligibility for the 529 Initiative, after the firms have disclosed the potential violations.  So, firms will need to focus on their ability to deliver all of the required information for FINRA as the disclosure period commences January 2013.

Second, while the 529 Initiative may be of value to member firms, Enforcement has specifically made no assurances that individuals associated with member firms utilizing the 529 Initiative will be offered similar terms.  Thus, an associated person who sold 529 plans covered by the 529 Initiative for the member firm, may not rely on the 529 Initiative.  As a result, Enforcement may recommend enforcement action against such individuals and may seek sanctions beyond those resulting from the initiative.