Firm Settles Reg BI Supervisory Failures on Plan Rollover Recommendations
Commentary by Jeff Ziesman
A firm settled FINRA charges for Regulation Best Interest ("Reg BI") failures and municipal securities rules violations concerning share class recommendations in plan rollovers.
According to the AWC, the firm made recommendations leading retail customers to invest in higher-cost share classes when conducting state-to-state 529 plan rollovers, despite the availability of lower-cost options. FINRA found that the firm (i) did not implement adequate supervisory procedures to ensure customers received applicable sales charge waivers or appropriate share classes for rollovers; (ii) failed to train representatives or supervisors on identifying and applying available waivers or special share classes that reduced costs; and (iii) did not sufficiently review transactions to ensure compliance with MSRB and SEC rules. These supervisory lapses resulted in at least 18 customers incurring approximately $17,000 in avoidable charges.
FINRA found that the firm violated SEA Rule 15l-1 ("Reg. BI") and MSRB Rule G-27 ("Supervision").
To resolve the violations, the firm agreed to (i) a censure; (ii) pay a $75,000 fine, with $50,000 allocated to MSRB violations; and (iii) retain an independent consultant to review supervisory systems, identify affected customers and oversee restitution payments.
Commentary
This matter is a continuation of the SEC's share class initiative, albeit in a different type of account. The SEC brought its first share class cases in 2017 against a registered investment adviser ("RIA") and its affiliated broker-dealer ("BD"). The crux of that and subsequent cases is that the RIA, by recommending share classes with 12b-1 fees that were paid to the affiliated BD, violated its fiduciary duty and duty of best execution. This is because cheaper share classes of the same funds were available to be sold to customers (i.e., without the 12b-1 fees). Eventually, the SEC initiated its "Share Class Selection Disclosure Initiative," which resulted in numerous firms self-reporting their violative conduct to the SEC.
For its part, FINRA also brought cases in this space. This FINRA AWC involves conduct in which FINRA alleges lower-cost options (i.e., cheaper shares) could have been recommended to (and purchased for) customers. Specifically, FINRA found a number of 529 plans available that offered a Class A sales charge waiver for state-to-state rollovers. FINRA found that the firm did not have proper procedures or training in place to ensure its field sales force, who recommended 529 plan rollovers, communicated the potential availability of these sales charge waivers.
As a result, the firm was fined $75,000 and required to make restitution to impacted customers within a specified period.