On January 28, 2019, FINRA issued Regulatory Notice 19-04, announcing their 529 Plan Share Class Initiative, and offering broker-dealers the opportunity to self-report potential violations. In a manner similar to the SEC’s Share Class Disclosure Initiative aimed at registered investment adviser firms in 2018, FINRA is encouraging broker-dealers who may have potential supervisory-related violations relating to share class selection in 529 plans sold by the firm’s representatives to self-report such potential violations. The deadline for such self-reporting is 12 Noon Eastern on April 1, 2019, according to the Notice. From there, the self-reporting firms will have until May 3, 2019, to provide certain required information to FINRA relating to the potential violations and issues.
According to FINRA, they are concerned that, for example, Class C shares may have been sold when a Class A share option was available and would be less expensive for the plan when the age of the intended beneficiary, along with when the expected use of the invested funds, is considered. A concern of the regulator is, it appears, that for firms that did not consider these factors, investors may have been economically harmed by investing in a share class that, over time, incurred higher aggregate costs than another available share class in the same plan.
FINRA’s Notice explains that for a firm that meets the requirements of the self-reporting initiative, if FINRA Enforcement determines to recommend a formal disciplinary action as a result of the findings of the review, then Enforcement would recommend that FINRA accept “a settlement that includes restitution for the impact on affected customers , and a censure, but no fine.” For firms that do not self-report and FINRA investigates and finds violations, the Notice states that any resulting enforcement action, “likely will result in the recommendation of sanctions beyond those described in the initiative.”
The period at issue in this initiative is lengthy, covering 5 ½ years, from January 2013 through June 2018.
Broker-dealer firms would be wise to review this Notice carefully, and evaluate their supervisory procedures and systems in place during the applicable period, and evaluate their exposure to regulatory action based upon FINRA’s stated concerns. Working with experienced legal counsel and their compliance and business leaders, the firm should then carefully decide whether to participate in the 529 Plan Share Class Initiative and make a self-report to FINRA. Due to the large time period, the amount of information to be provided with a self-report, and the work necessary to review and consider options and then prepare and provide the report, firms should move on this much sooner rather than later.
If your firm would like to discuss their situation and evaluate options for participating in the initiative, we’d welcome the opportunity to speak with you, and see how The Beck Law Firm, LLC can be of assistance.You can reach us at 678-344-5342.