FINRA Notice 19-04 – 529 Share Class Self-Report Initiative
On January 28th, 2019 the Financial Industry Regulatory Authority (FINRA) released Regulatory Notice 19-04, calling attention to FINRA concerns that firms may have failed to reasonably supervise share class selection in 529 plans. Specifically, customers may have purchased an “inappropriate” share class. FINRA encourages firms to review their controls and determine if any clients were negatively impacted by the firm’s sale of a share class that was not the least expensive alternative. Qualifying firms that participate by self-reporting to FINRA will only have to pay restitution to affected clients and will not be fined further. Firms that do not participate in the self-reporting initiative and are later found to have supervisory failures will likely be subject to additional sanctions.
What Should My Firm Be Doing?
Member firms should review their supervisory programs and procedures to determine if supervision was not reasonable and are encouraged to pay attention to the following:
- Training provided to representatives related to 529 plan share classes costs and benefits
- Determination of appropriate share class purchases
- Transactional reviews
- Potential breakpoint discounts or sales charge waivers
The notice also reminds member firms of an IRS Code, effective January 2018, which expanded the potential use of 529 assets to include tuition for grades K-12. Subject to certain limitations, up to $10,000 per year can be withdrawn from a 529 plan tax-free when used for elementary or secondary educational expenses. Firms must consider these facts when reviewing their procedures as well as the time horizon of the invested assets as it pertains to the share class selection. Qualifying schooling expenses may be incurred when the beneficiary is as young as four or five years old.
- Firms must self-report by written notification to FINRA Enforcement by midnight on the morning of April 1, 2019 (Effectively, March 31, 2019)
- Firms who self-report must also comply with submitting the requested information and remediation plan to FINRA by May 3, 2019
- The disclosure review period is January 2013 through June 2018
For more information or help with your remediation effort,
complete our contact form or call (804) 965-5400.
About the Authors:
Ralph Magee is a Senior Consultant with over 20 years of experience in the financial industry. Through a variety of roles with Wachovia Securities, LLC, and The Financial Group of Virginia, Ralph gained his expertise in the areas of trading, compliance and retail brokerage, including his extensive understanding of trading and regulatory reporting of preferred securities, convertible stocks and bonds, and equity-linked securities. A member of the Oyster Consulting team since 2010, Ralph has led multifaceted teams in two large scale client remediation projects, completed the registration and design of compliance programs for various RIAs, and continues to monitor the personal trading compliance of national RIAs. The ability to keep projects on track, within scope and on budget, is one of Ralph’s greatest skills.
Tim Buckler has spent 10 years in the financial services industry, with a focus on cybersecurity, data analysis, and compliance. Tim’s experience includes conducting cybersecurity assessments, branch reviews, GDPR assessments, insurance licensing and insurance carrier appointments, and providing compliance support to broker-dealers and investment advisors. He has worked with firms of varying size, from small RIAs to one of the top clearing firms in the United States. Tim also has assisted in regulatory remediation projects related to 12b-1 Mutual Fund fees, Large Option Position Reporting and NAV fee waivers.