Merrill Lynch, Raymond James & Associates and Raymond James Financial Services have agreed to pay a total of $12 million in restitution to customers for 529 savings plan-related violations, according to Finra.
Finra says the customers incurred excess fees on their investments in the tax-advantaged 529 savings plans, designed to encourage saving for future education costs.
The payment of excess fees resulted from the failure of the three firms to “reasonably supervise” 529 plan share-class recommendations, according to Finra.
Merrill Lynch has agreed to pay at least $4 million in restitution relating to the sale of Class C shares to 529 plan accounts with young beneficiaries.
RJA has agreed to pay more than $3.8 million in restitution, while RJFS has agreed to pay $4.2 million.
"Finra member firms must be cognizant of all costs to their customers when recommending a product,” Jessica Hopper, acting head of Finra’s Department of Enforcement, says in a statement.
“This is particularly important where an unsuitable recommendation may cause customers to incur higher fees year after year, especially in the case of young beneficiaries. Returning money to harmed investors as quickly and efficiently as possible remains a priority,” she adds.
What the firms did wrong
The 529 savings plans are tax-advantaged municipal securities designed to encourage saving for the future educational expenses of a designated beneficiary. They are sponsored by states, state agencies or educational institutions.
States offer 529 savings plans either directly, through designated broker-dealer firms, or both. Because the 529 savings plans are municipal securities, the sales of those plans are governed by the rules of the Municipal Securities Rulemaking Board.
Shares of 529 savings plans are sold in different classes with different fee structures.
Class A shares typically impose a front-end sales charge but charge lower annual fees compared to other classes. Class C shares typically impose no front-end sales charge but impose higher annual fees than Class A shares.
Finra notes that since Class C shares may be more expensive over extended holding periods, Class A shares are frequently a more suitable option for accounts with younger beneficiaries and longer investment horizons.
Merrill Lynch, RJA and RJFS failed to ensure that registered representatives considered the various fee structures when making 529 savings plan recommendations to customers, particularly for accounts that had young beneficiaries and long-term investment horizons, according to Finra.
Finra says Merrill Lynch, RJA and RJFS failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to supervise recommendations of share classes in 529 savings plans.
The supervisory systems of the three firms didn’t require registered representatives or supervisors to evaluate beneficiary age and the number of years until expected withdrawals — combined with the different fees and expenses of the share classes — when making share class recommendations, Finra adds.
RJA is a dually registered broker-dealer and RIA, and it includes employee and independent-employee advisors. RJFS is a broker-dealer firm. Both firms are entities of Raymond James Financial.
Violations were caught before the self-reporting initiative
Finra says these violations were identified by the SRO before it announced its 529 Plan Share Class Initiative in January.
The 529 Plan Share Class Initiative was Finra’s first ever self-reporting initiative, which encouraged member firms to voluntarily fess up to potential violations relating to 529 plans. At the time, Finra said the initiative “stresses restitution and rapid remediation” while waiving fees that would otherwise be imposed on violators.
Under Finra’s 529 Plan Share Class Initiative, broker-dealer firms were encouraged to review their supervisory systems and procedures governing 529 plan share class recommendations, self-report supervisory violations and provide the SRO with a plan to remediate harmed customers.
To be eligible for the 529 Plan Share Class Initiative, Finra gave broker-dealer firms an April 1, 2019 deadline to self-report but later gave extensions to firms that gave notifications of their intention to self-report but needed more time to complete the process.
Even if the violations pre-dated Finra’s 529 Plan Share Class Initiative, the SRO says it recognized and factored in the “extraordinary cooperation” of Merrill Lynch, RJA and RJFS when it determined the “appropriate monetary sanction” for each of the three firms.
In settling the matter, Merrill Lynch, RJA and RJFS neither admitted nor denied the charges but consented to the entry of Finra’s findings.