A round of settlements involving the Financial Industry Regulatory Authority’s 529 plan share class initiative shows that a number of firms are agreeing to enhance supervisory systems and procedures and compensate harmed customers.
Letters of acceptance, waiver and consent (AWC) for five cases involving the 529 initiative, were listed Tuesday in FINRA’s disciplinary actions online database.
The firms that settled the 529 initiative matters, neither admitted nor denied FINRA’s findings and no fines were assessed by FINRA in recognition of the firms’ cooperation. However, restitution to customers from this batch of cases totals $9.5 million.
FINRA’s 529 initiative was launched in 2019. It is designed in part, to promote member firms’ compliance with the rules governing share-class recommendations of 529 savings plans, i.e., tax-advantaged municipal securities designed to provide savings for future educational expenses.
According to a FINRA release, “the 529 initiative encourage[s] firms to review their supervisory systems and procedures regarding 529 plan share-class recommendations, self-report potential violations of applicable rules, describe and demonstrate past or future corrective actions, and provide FINRA with a plan to remediate harmed customers.”
In one settlement involving Advisor Group LLC subsidiaries: Royal Alliance, Sagepoint Financial, and FSC Securities Corporation, FINRA found that the subsidiaries violated MSRB Rule G-27 regarding supervision and supervisory procedures.
The firms agreed to a censure for each firm and orders of restitution and estimated interest totaling approximately $485,000 after FINRA found that from 2013 to 2018, the firms’ written supervisory procedures did not reasonably address share-class suitability factors specific to 529 plan investments.
FINRA also found that the firms’ transaction review system was not reasonably designed to identify inconsistent 529 plan share-class recommendations.
In another settlement involving similar charges, FINRA found that for a five-year period until December 4, 2016, Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, failed to establish and maintain a supervisory system in violation of MSRB Rule G-27. The firms, who FINRA said exhibited “extraordinary cooperation” in the matter, agreed to an order of restitution of just under $3.4 million, plus interest and a censure.
LPL Financial, a FINRA member since 1973, voluntarily self-reported potential issues with its supervisory system to FINRA as part of the 529 Initiative. According to the AWC, from January 2013 to March 2020, LPL’s system for supervising representatives’ 529 plan rollover recommendations was not reasonably designed.
Ultimately, according to FINRA, the lack of policies and procedures resulted in LPL overcharging customers $982,354 in front-end sales charges in violation of MSRB Rule G-27 (a) and (b).
The resulting settlement includes a censure and order for restitution plus interest of over $1.2 million to be paid to owners of a little over 1900 accounts. LPL also agreed to a proposed plan to remediate affected customers and received a credit for extraordinary cooperation.
UBS Financial Services, Inc.’s violation of MSRB Rule G-27 similarly stemmed from voluntary self-reporting to FINRA.
FINRA found that for a period of five years until June 30, 2018, UBS did not subject initial 529 plan recommendations at account opening to the supervisory controls on its order entry platform. As a result, FINRA concluded that the firm’s supervisory system was unreasonable and failed to identify potentially unsuitable 529 plan share-class recommendations.
UBS agreed to an order for restitution of approximately $4 million plus interest and a censure.
FINRA found that from January 2013 to March 2017, MML Investor Services failed to provide adequate guidance to representatives regarding the 529-plan share-class suitability factors and did not provide supervisors with information needed to properly evaluate the suitability of the recommendations.
Consequently, FINRA concluded that MML violated MSRB Rules G27(a), (b) and (c) and FINRA Rules 3110(a) and 2010. The firm was censured and agreed to provide approximately $1.8 million in remediation to qualified customers.
MML also received a credit for extraordinary cooperation with FINRA.