FINRA Notice 19-04 – 529 Share Class Self-Report Initiative

By Ralph Magee and Tim Buckler

Abstract Architecture represents compliance regulatory background

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  Subject to certain limitations, up to $10,000 per year can be withdrawn from a 529 plan tax-free when used for elementary or secondary educational expenses.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.

Important Dates

  • 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
About The Authors
Photo of Ralph Magee

Ralph Magee Jr.

Ralph Magee Jr. is a securities industry professional with over 25 years of experience in the financial services industry. Ralph has led multifaceted teams in large-scale client remediation and clearing platform conversion-related projects. Ralph also uses his expertise in trade reporting providing large broker dealers project management and subject matter expertise related to the Consolidated Audit Trail (CAT).

Photo of Tim Buckler

Tim Buckler

Tim Buckler has spent 10 years in the financial services industry, with a focus on project management, cybersecurity, data analysis, and compliance. Tim’s experience includes project management support for clearing platform conversions, cybersecurity assessments, GDPR and CCPA assessments, performing 12b-1 Mutual Fund fees analysis for regulatory initiatives, and ownership changes for custodial IRA held annuities.