$2.7 Million in Restitution to Customers; Two Matters Resolved Through Settlements and 17 Matters Resolved Through Cautionary Actions, Resulting in Remediation to Customers and Correction of Supervisory Deficiencies
FINRA today announced initial results of its voluntary self-reporting 529 Plan Share Class Initiative (529 initiative), which include more than $2.7 million in restitution and interest to customers owning approximately 3,900 accounts, arising from settlements with two firms and 17 matters resolved through cautionary action letters. All 19 firms in this initial group agreed to remediate harmed customers and to enhance their supervisory systems and procedures, where appropriate. In January 2019, FINRA launched the initiative through Regulatory Notice 19-04 to promote member firms’ compliance with the rules governing share-class recommendations of 529 savings plans and promptly compensate harmed customers.
529 plans are tax-advantaged municipal securities designed to save for the future educational expenses of a designated beneficiary. Shares of 529 plans are often sold in different classes with different fee structures. Certain share classes may be significantly less expensive over extended holding periods. These share classes are therefore frequently a more cost-effective choice for 529 plan accounts with younger beneficiaries and longer investment horizons, or accounts that qualify for breakpoint discounts.
The 529 initiative encouraged 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 a settlement issued today, Morgan Stanley Smith Barney LLC agreed to pay approximately $1.7 million in restitution and interest to customers who incurred excess fees in their 529 plan accounts. FINRA found that the firm’s supervisory system was not reasonably designed to supervise 529 plan share-class recommendations executed in certain legacy accounts or transactions made directly with 529 plans. Morgan Stanley’s supervisory system for 529 plan recommendations relied on “grids” integrated within its order entry systems to identify an appropriate share-class selection. However, the firm did not integrate the grids with certain legacy account systems until 2016, and it did not have a process to check that the grids were applied to transactions made directly with 529 plans. After its voluntary disclosure to FINRA through the initiative, Morgan Stanley agreed to provide restitution to certain customers who purchased class C shares in accounts with young beneficiaries and long-term time horizons, and to implement additional supervisory controls relating to transactions made directly with 529 plans.
Also in a settlement issued today, B. Riley Wealth Management Inc. (BRWM) agreed to pay approximately $250,000 in restitution and interest to 529 plan customers based on the firm’s failure to have a reasonably designed supervisory system relating to its 529 plan business. Among other findings, FINRA found that BRWM did not provide adequate guidance to its registered representatives and supervisors regarding 529 plan share-class recommendations and lacked a system to supervise transactions made directly with 529 plans. After its voluntary disclosure to FINRA through the initiative, BRWM agreed to provide restitution to certain customers who purchased class C shares in accounts with young beneficiaries and long-term time horizons, and to improve its system and procedures.
In settling these matters, neither firm admitted or denied the charges, but each consented to the entry of FINRA’s findings. In addition, FINRA recognized Morgan Stanley’s and BRWM’s extraordinary cooperation with FINRA through their participation in the 529 initiative, and the firms were not fined.
“The purpose of the 529 initiative is to remedy potential supervisory and suitability violations related to 529 plan share-class recommendations, and to return money to harmed investors as quickly and efficiently as possible,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement. “We are very pleased with the substantial progress made thus far, are encouraged by the level of cooperation of member firms that self-reported, and expect to resolve the remaining matters in the coming year.”
Investors can obtain more information about 529 plans by visiting FINRA’s 529 Savings Plans site and can learn about other ways to save for future educational expenses on FINRA’s Saving for Education site.
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry – brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.
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