FINRA Gives Firms Until April 1 to Self-Report 529 Plan Share Class Violations

Kathryn FlynnBy:  Kathryn FlynnBy: Savingforcollege.com

FINRA Gives Firms Until April 1 to Self-Report 529 Plan Share Class Violations

Kathryn FlynnBy:  Kathryn FlynnBy: Savingforcollege.com

FINRA’s new 529 Plan Share Class Initiative allows firms to self-report any issues with 529 plan share class recommendations and supervision by April 1 to avoid fines. FINRA hopes the initiative will help to remedy potential violations and return money to affected investors as quickly and effectively as possible.

FINRA raises concerns about 529 plan share class recommendations

529 plans are municipal securities designed to help families save for a beneficiary’s future education. Sales of 529 plans are governed by the rules of the Municipal Securities Rulemaking Board (MSRB), specifically:

  • MSRB Rule G-19 (Suitability of Recommendations and Transactions) requires that firms and brokers who sell municipal securities have a reasonable basis to believe that a recommended transaction is suitable in light of a consumer’s investment profile.
  • MSRB Rule G-27 (Supervision) requires firms to establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable MSRB rules.

In conducting reviews of 529 plan sales, FINRA has learned that over the past several years there have been many supervisory issues with 529 plan recommendations. Some firms have failed to reasonably supervise their brokers’ recommendations of 529 plans, and some brokers have been selling 529 plan share classes that do not meet the account owner’s investment objectives.

The 529 Plan Share Class Initiative allows firms to self-report MSRB rule violations in exchange for a recommendation of settlement terms that include restitution for the customer and a plan to fix the issue, without a fine.


529 plan Class A shares versus Class C shares

Like mutual funds, advisor-sold 529 plans are available in different share classes with varying fee structures. Most 529 plans are sold as Class A shares or Class C shares. Investors who purchase Class A shares typically pay an upfront sales charge and lower annual fees compared to other 529 plan share classes. In most cases, Class A shares are suitable for long-term investors. Class C shares do not have a front-end sales charge, but come with higher annual fees, often making them a better choice for investors with a shorter time horizon.

(Some 529 plans also offer shares that automatically transition from C shares to A shares after a set period of time. These C to A convertible share classes were designed to minimize suitability concerns for advisors when recommending 529 plan share classes.)

In a video interview, Susan Schroeder, FINRA’s Executive Vice President of Enforcement notes that in many cases Class A shares are a more cost effective option when the 529 plan beneficiary is under 12 years old, and there might be issues if Class C shares were recommended for a beneficiary younger than 12.

However, advisors need to understand each investor’s particular circumstances and objectives before recommending a 529 plan share class. Recent changes to the tax law allow 529 plans to be used to pay for up to $10,000 per year in K-12 tuition. Investors using a 529 plan to pay for K-12 tuition will likely have a shorter time horizon than an investor saving for college, and therefore Class C shares may be more suitable.

How firms can self-report supervisory violations to FINRA

FINRA recommends that all firms that sell 529 plans should consider participating in the 529 Plan Share Class Initiative, and should look out for potential areas of concern, including failure to:

  • provide training regarding the costs and benefits of different 529 plan share classes
  • understand and assess the different costs of share classes for individual transactions
  • receive or review data reflecting 529 plan share classes sold
  • review share-class information, including potential breakpoint discounts or sales charge waivers, when reviewing the suitability of 529 plan recommendations

Firms who fail to self-report potential violations by the April 1 deadline will be subject to sanctions greater than what would be recommended under the initiative, including fines.

To self-report violations, firms must provide written notification by email to 529Initiative@finra.org, or by mail to 529 Plan Initiative, FINRA, Department of Enforcement, Brookfield Place, 200 Liberty Street, New York, NY 10281. Firms must confirm eligibility for the 529 Plan Initiative by submitting additional information listed in Regulatory Notice 19-04 by May 3, 2019.


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