FYI: Perhaps taking a page from the SEC’s playbook, FINRA has launched its first-ever self-reporting initiative for member BDs. Under the initiative, BDs are encouraged to review their supervisory systems and procedures governing 529 plan share-class recommendations and self-report to FINRA any supervisory violations found, along with a plan to remediate harmed customers. In response, according to FINRA’s news release, FINRA’s Department of Enforcement will recommend that FINRA accept a settlement that includes restitution for the impact on affected customers and a censure, but no fine.
Although FINRA’s initiative is only aimed at share class recommendations made for customers’ 529 plans, the similarities are striking between FINRA’s 529 initiative and the SEC’s 2018 initiative aimed broadly at investment advisers selecting mutual fund share classes for their clients. (For more on the SEC’s Share Class Selection Disclosure (SCSD) Initiative, see my prior ‘FYI’ postings dated September 21, 2018, May 1, 2018, and February 12, 2018.)
The central concern under FINRA’s initiative appears to be whether BD firms have in place adequate supervisory systems to ensure that share class recommendations made by firm reps are suitable for their customers’ 529 plans and tailored to the unique circumstances and needs of each customer. Like the SEC’s SCSD Initiative, the response is focused on restitution and rapid remediation with the intent of making harmed customers whole, rather than on imposing regulatory fines.
FINRA has warned that if a firm does not self-report under the 529 initiative but FINRA later identifies supervisory failures by that firm, any resulting disciplinary actions likely will result in the recommendation of sanctions beyond those described under the initiative. This is similar to a warning the SEC issued to investment advisers last year under the SCSD Initiative.
FINRA Regulatory Notice 19-04 (529 Plans): http://www.finra.org/industry/notices/19-04.
FINRA Press Release announcing 529 initiative: http://www.finra.org/newsroom/2019/finra-launches-new-initiative-member-firms-self-report-529-savings-plan-violations.
FINRA video addressing 529 initiative: http://www.finra.org/industry/529-plan-share-class-initiative.
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