FINRA Releases Results of Voluntary 529 Plan Share Class Initiative

FINRA released the results of its voluntary self-reporting 529 Plan Share Class Initiative. The initiative - launched in January 2019 - was established by FINRA to promote firm compliance with suitability requirements related to transactions in 529 savings plans, and to provide compensation to harmed customers.

FINRA reported that $2.7 million in restitution and interest across approximately 3,900 accounts was returned to harmed customers. The restitution arose from settlements with two firms and 17 matters resolved through "cautionary action letters."

In the first Letter of Acceptance, Waiver and Consent, FINRA found that a firm that acquired legacy accounts from a merger did not fully integrate these accounts into its order entry and account systems. The firm’s systems automatically compare 529 recommendations with pre-determined share-class suitability guidelines. As a result, FINRA found the firm did not reasonably supervise thousands of transactions involving 529 plans in the legacy accounts. In addition, the firm failed to supervise representatives effecting 529 plan transactions outside of the firm's order entry and account systems, resulting in a failure to detect thousands of transactions that bypassed the automated checks. To settle the charges, the firm agreed to (i) a censure and (ii) payment of restitution of $1,460,518 plus interest.

In a second Letter of Acceptance, Waiver and Consent against a different firm, FINRA found that the firm failed to:

• provide guidance to representatives regarding share-class differences;
• have written supervisory procedures that (i) required supervisors to evaluate the suitability of share-class recommendations and (ii) provided adequate guidance regarding factors involved in such suitability review;
• check that supervisory reviews were conducted on opened accounts; and
• maintain account information or capture trade data for its 529 plan accounts.

To settle the charges, the firm agreed to (i) a censure and (ii) payment of restitution and interest of $252,740.

In both disciplinary actions, the firms were found in violation of MSRB Rule G-27 ("Supervision"). FINRA recognized both firms' "extraordinary cooperation" through their voluntary participation in the 529 initiative, and did not issue any fines for the misconduct.