Bates News, Compliance and Regulatory Alerts  |  02-01-19

FINRA Rolls Out Its 529 Plan Share Class Initiative - Is Your Firm Ready to Address It?


On the heels of the SEC’s 12b-1 Share Class Initiative, FINRA just announced its own Share Class Initiative. FINRA’s Share Class Initiative sets a deadline of April 1, 2019 for firms to self-report 529 savings plan share class violations and to provide FINRA with a plan to remediate harmed clients.  FINRA seeks to promote compliance with its supervision and suitability rules regarding share-class recommendations to clients with 529 savings plans (“529 plans”). FINRA’s initiative is also intended to allow firms to “identify and remediate any defects” in their systems and procedures and to “compensate any customers harmed by supervisory failures.” See FINRA Regulatory Notice 19-04.

Bates Group’s Proven Experience with the SEC’s Share Class Initiative Will Help Your Firm with FINRA’s 529 Plan Initiative

Bates has deep and proven experience and expertise in share class disclosure matters. Most recently, on behalf of over a dozen major national and regional financial institutions, Bates provided important assistance to firms and counsel participating in the SEC’s Share Class Selection Disclosure Initiative and related SEC Examinations.

Case Studies:
  • Working with data from our clients’ internal systems and/or major custody and clearing firms, we determined the extent of 12b-1 fees received during the applicable time period and identified the availability of lower-cost alternative share classes that were available for purchase. We then provided the correct information for filing with the SEC, assisted in the remediation process to individual accounts, and provided additional reporting by FA and other requested information and schedules as requested by counsel. 
  • As a result of our prior work for clients supporting them through FINRA and SEC examinations and investigations, we are able to determine the cost impact on clients by comparing the share class purchased to lower share classes of the same fund that could have been purchased.  In those instances, we calculated the differential in fees as well as interest on that differential, and assisted in making remediation payments to their impacted clients.
  • We have also assisted clients in dozens of retail litigation cases involving share class suitability.  Many of these disputes contend that investors should have been invested in class A shares instead of the class B or class C shares purchased.  Bates has modeled account profits and losses, sales loads, operating expenses and total cost of ownership (sales loads plus operating expenses) of actual mutual fund positions held (typically B share or C share classes) versus hypothetical investments of the same fund in a different share class (typically A shares) to assist our clients. 

Bates Group’s 529 Disclosure and Remediation Plan

To support firms facing FINRA’s 529 Plan disclosure and remediation initiative, Bates has created a plan that provides essential end-to-end steps and solutions to identify and address accounts and clients impacted by share class selection. We perform data analysis, examine regulatory reporting, review share class selection policies and disclosure practices, identify methodology and impacted accounts, perform calculations and provide remediation amounts. Most importantly, after consultation with counsel, our disclosure and remediation plan culminates in a report which can be used directly with regulators. Our plan includes back-end steps to clear exceptions, track client communications, and update written supervisory policies, procedures, and compliance programs.

FINRA Cautions Against Waiting to Take Action

In its Regulatory Notice, FINRA cautions that “if a firm does not self-report under the 529 Initiative but FINRA later identifies supervisory failures by that firm, any resulting disciplinary action likely will result in the recommendation of sanctions beyond those described under the initiative.” Enforcement also notes that it will provide “no assurance that individuals associated with these firms will be offered similar terms if they sold 529 plans to customers in violation of MSRB rules, or violated any securities laws.”

About Bates Group's Share Class Support:

Regulatory Investigations and Enforcement

Bates Group supports counsel in FINRA and SEC share class investigations and arbitrations, and break-even analysis work. This includes mining large datasets and providing clear and usable analysis as to the relative cost of selecting particular share classes in light of the plan beneficiaries’ age, the difference in fee levels of the classes, and the breakpoints of the classes.  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.

Compliance Solutions

Bates works with clients to develop programs to help mitigate conflicts of interest associated with mutual fund share class selection. We develop procedures relating to due diligence, approval, ongoing reviews and disclosures. Additionally, we assist firms with testing these and other types of conflicts-related programs to ensure compliance with internal policies and procedures, as well as regulatory requirements and expectations.

Contact Bates today to put our proven Share Class Experience to Work for your firm:

Alex Russell, Managing Director, Securities Litigation & 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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Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.

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