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Finra to Give B-D Firms Extension to Settle 529 Plan Violations Under Self-Reporting Initiative

By Rita Raagas De Ramos May 20, 2019

Finra will give member firms that have notified the self-regulator of their intention to self-report 529 plan share class violations an extension to provide all the information needed by the SRO if they ask for it.

“We will be happy to provide an extension of time,” Susan Schroeder, head of Finra’s Department of Enforcement, said Friday at the SRO’s annual conference in Washington D.C.

Schroeder said she understands that “there will be a lot of data issues” involved in mining information related to 529 plan share class violations.

As reported, Finra announced this self-reporting initiative — a first for the SRO — in January this year.

The initiative is specifically for violations of rules governing the recommendation of 529 savings plans. These 529 plans — usually used by parents thinking ahead for their children’s college education — are tax-advantaged municipal securities. They are designed to encourage saving for the future educational expenses of a designated beneficiary, and shares are commonly sold in different classes with fees and expenses that vary widely from plan to plan.

Under Finra’s 529 Plan Share Class Initiative, announced via Regulatory Notice 19-04, broker-dealers are encouraged to review their supervisory systems and procedures governing 529 plan share-class recommendations, self-report supervisory violations and provide Finra with a plan to remediate harmed customers.

If the broker-dealers complete all those required steps under the 529 Initiative, Finra’s Department of Enforcement will recommend that the self-regulator accept a settlement which includes restitution for the impact on affected customers and a censure, without imposing any fine.

Schroeder said her department has seen a range of self-reporting — from those who have identified violations and have submitted a plan of action for restitution for harmed investors to those who are unsure if their brokers have committed violations and are requesting further guidance from Finra.

“This is very much work in progress,” she said.

Under the original schedule, broker-dealers have until the end of May to provide all the information needed by Finra.

Finra has said this initiative underscores the importance and popularity of 529 plans and the need to ensure investors in these plans are well-protected.

The SRO is concerned some broker-dealer firms are not providing supervision that’s “reasonably designed” to ensure representatives recommend a 529 plan share class tailored to the unique circumstances and needs of each customer.

According to Finra, the potential areas of concern include 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.