{"id":2299,"date":"2019-02-14T12:00:03","date_gmt":"2019-02-14T18:00:03","guid":{"rendered":"http:\/\/blogs.luc.edu\/compliance\/?p=2299"},"modified":"2019-02-14T12:00:03","modified_gmt":"2019-02-14T18:00:03","slug":"finra-releases-regulatory-notice-announcing-529-plan-share-class-initiative","status":"publish","type":"post","link":"https:\/\/blogs.luc.edu\/compliance\/?p=2299","title":{"rendered":"FINRA Releases Regulatory Notice Announcing 529 Plan Share Class Initiative"},"content":{"rendered":"

FINRA Releases Regulatory Notice Announcing 529 Plan Share Class Initiative<\/strong><\/p>\n

Mary Donohue<\/em><\/p>\n

Associate Editor<\/em><\/p>\n

Loyola University Chicago School of Law, JD 2020<\/em><\/p>\n

On January 28, 2019 the Financial Industry Regulatory Authority (FINRA) released<\/a> Regulatory Notice 19-04 announcing a 529 Plan Share Class Initiative encouraging firms to self-report potential violations. Broker-Dealers are encouraged to consider self-reporting under the initiative if they have identified specified failures in connection with 529 plan recommendations, and have the ability to assess the impact of the failures. Firms have until April 1st<\/sup> to notify FINRA in writing if it has decided to self-report.<\/p>\n

<\/p>\n

Background<\/strong><\/p>\n

529 plans are tax-advantaged municipal securities designed to encourage saving for future educational expenses of designated beneficiaries. Since they are municipal securities, issued<\/a> by a non-government entity, they are governed by the rules of the Municipal Securities Rulemaking Board (MSRB). MSRB Rule G-19<\/a>, Suitability of Recommendations and Transactions, requires firms and brokers selling municipal securities to have a reasonable basis to believe that a recommended transaction is suitable in light of a customer\u2019s investment profile. MSRB Rule G-27<\/a>, Supervision, requires firms to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations, and applicable MSRB rules<\/p>\n

Shares of 529 plans<\/a> are sold in different classes with differing fee structures. Class A shares typically impose a front end sales charge but charge lower annual fees compared to other classes. Class C shares typically have no front-end sales charge but impose higher annual fees. Cost impacts among classes varies depending on the length of time the customer holds the securities. The MSRB has explained that information known about the designated beneficiary is generally relevant in weighing the investment objectives of the customer, including any information about their age and number of years until the funds are needed to pay qualified education expenses of the beneficiary<\/a>. For purposes of G-19, the MSRB has said<\/a> that information regarding the beneficiary should be treated as information relating to the customer\u2019s investment objective.<\/p>\n

In the context of mutual funds, FINRA has repeatedly<\/a> cautioned that firms must supervise recommendations to purchase higher-expense share classes, especially when an investor is seeking long-term investment, like college expenses. With regard to Class C shares, for example<\/a>, FINRA has cautioned that customers should be informed of potential long-term \u201ceffect of the higher ongoing sales charges\u201d associated with holding these shares, and that firms should \u201cmaintain written records of [such] discussions in their files.\u201d<\/p>\n

New Regulations<\/strong><\/p>\n

Effective in January of last year, amendments<\/a> to the Internal Revenue Code under the Tax Cuts and Jobs Act, 529 plans were expanded so they could be used for tuition for grades K-12, subject to certain limitations. While 529 plan distributions were tax-free when used for qualified higher education expenses, now, up to $10,000 per year in 529 plan withdrawals would be tax-free if used for elementary or secondary educational expenses. These additional considerations underscore previous recommendations that a share class be tailored to the unique features of the customer and the importance of supervising such recommendations<\/a>.<\/p>\n

Because of the unique features of 529 plans, FINRA was concerned<\/a> member firms might not be able to adequately supervise these plans. Thus, this newly released initiative is intended to encourage firms to assess supervisory system and procedures guiding recommendations for share-classes, identify and remediate defects, and compensate investors harmed by supervisory failures.<\/p>\n

Self-Reporting<\/strong><\/p>\n

Broker-dealers are encouraged<\/a> to consider self-reporting under the initiative if they have identified certain supervisory failures in connection with 529 plan recommendations, and have the capability to assess the impact of these failures. If a firm has decided to self-report it has to notify FINRA in writing by April 1, 2019 to be eligible for the initiative. After filing this notice, they must confirm eligibility to participate by submitting the following information<\/a> to FINRA for the period of January 2013-2018:<\/p>\n