Bates News,Compliance and Regulatory Alerts - 03-08-19

Alert: FINRA Releases FAQs with Important Information About Its 529 Plan Share Class Initiative

Alert: FINRA Releases FAQs with Important Information About Its 529 Plan Share Class Initiative

FINRA’s 529 Plan Share Class Initiative (“Initiative”) self-reporting deadlines have been pushed back one month to allow firms additional time to review their supervisory systems, procedures and past transactions to identify sales of 529 plan share classes. The extension also allows firms more time to consider additional information made available by FINRA (Frequently Asked Questions “FAQs”) and to determine whether to self-report.

The Initiative, designed to promote compliance with rules governing 529 plan recommendations and sales, requires firms to identify and remedy potential supervisory and suitability violations and to return money to impacted investors. Firms that participate in the Initiative “will avoid any fine that FINRA might otherwise impose in an Enforcement action concerning the firm’s failure to supervise the suitability of 529 plan share class recommendations. In addition, a firm that participates in this Initiative will have the benefit of a discussion with FINRA about the steps it plans to take to remediate its supervisory failures and pay restitution to customers.”

The new deadlines are now April 30, 2019 for firms to provide FINRA Enforcement with notice that they will self-report, and May 31, 2019 for confirming their eligibility by submitting the additional information specified in Regulatory Notice 19-04.

The 18 FAQs address a series of qualitative and substantive concerns about the Initiative. For example, FINRA provides additional information on the types of 529 plan-related supervisory procedures that participating firms might seek to review, and also commits to working with firms to identify appropriate risk-based ways to analyze transactions, and then to work collaboratively with firms to fix any supervisory deficiencies and remediate affected customers. FINRA also clarifies existing guidance by, for example, asserting that the Initiative is not establishing a per se rule on suitability or changing existing obligations or duties. 

Following the FAQ release, Robert Lavigne, Managing Director, Bates Compliance Solutions, recommends:

"Firms should assess the procedures that were in place during the review period to ensure they were reasonably designed to properly supervise the sales of 529 plans, as well as the share class selection. They should also perform testing to verify there was not a breakdown in the share class selection and approval process that may have led to unsuitable transactions.“

Bates Group has been encouraging firms to prepare for this Initiative since its inception. As for the extended deadlines, Alex Russell, Managing Director of Securities Litigation & Regulatory Enforcement at Bates stated:

“Firms participating in FINRA’s 529 Plan Share Class Initiative now have additional time to meet FINRA’s qualitative and quantitative expectations. Addressing the challenges we previously identified, like obtaining plan sponsor data, compilation and formatting, and transaction analysis, remain key to being responsive to FINRA.”

Bates Group’s 529 Qualitative and Quantitative Support

Qualitative Support:

Within the FAQs, FINRA explicitly—in bold print—emphasizes the need to conduct a qualitative review in deciding whether to participate in the Initiative. Bates Group’s experienced team of professionals, including experts experienced in sales practice, supervision, suitability and compliance, supports firms in their qualitative review of their supervision and compliance programs in support of 529 plan sales. Bates performs qualitative reviews of 529 plan share class programs, offering supervisory reviews and assessments to test your firm’s systems and procedures, including suitability of transactions and training.

Quantitative Support:

Bates Group has supported and is engaged to support in-house and outside counsel in response to this and prior regulatory share class initiatives, investigations and arbitrations, and break-even analysis work. This includes mining large datasets and providing clear and usable analysis regarding the relative cost of selecting particular share classes in light of the plan beneficiaries’ ages, the difference in fee levels of the classes, and class breakpoints. In connection with FINRA’s announcement, we can help determine instances where a less-expensive share class of the same fund may have been available and the difference in fees paid by impacted clients.


For more information about how Bates Group can help, please contact us today:

Alex Russell, Managing Director, Securities Litigation and Regulatory Enforcement

email: phone: 971-250-4353

David Birnbaum, Managing Director

email: phone: 917-273-2682

Robert Lavigne, Managing Director, Bates Compliance Solutions

email: phone: 508-868-6741

Scott Lucas,Managing Director, Regulatory and Internal Investigations

email: phone: 971-250-4344


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