The Financial Regulatory Authority (FINRA) recently announced an initiative it presents as an effort to promote member firms’ compliance with rules applicable to the recommendation of 529 plans. FINRA’s initiative is designed, first and foremost, to encourage firms to engage in a self-assessment specific to their 529 plan sales as well as the supervision of such sales. But, as with similar regulatory initiatives, this program only affords firms a degree of protection as to any issues identified by the firm if the firm self-reports to FINRA and takes corrective measures. The decision to self-report always requires a considered approach guided by experienced securities regulatory counsel. Of course, that calculus is dramatically impacted by the announcement of such an initiative. Thus, to avoid (or least minimize) problems with FINRA, member firms are encouraged to review their practices as well as supervisory procedures and controls with an eye on the key areas of regulatory concern.
Key Considerations
A primary factor to consider is whether your firm’s supervisory system accounts for unique aspects of 529 plans. A supervisory system that works well for monitoring stock recommendations is not necessarily going to be reasonably designed for supervising 529 plan recommendations. To address this key issue, firms should ensure their procedures and systemic controls are designed to:
- Identify specific attributes relevant to the suitability of 529 plans offered by the firm and communicate these attributes to supervisory personnel;
- Ensure the systems are designed to factor in account and/or household holdings to identify the applicability of breakpoints and other share class considerations;
- Flag share-class recommendations that are potentially unsuitable and/or more expensive for the customer by incorporating meaningful, data-driven controls; and
- Adequately follow-up on flagged transactions, including communications with clients by supervisory or compliance personnel.
As always, a firm’s investment in supervisory controls should conform to the relevance of the activity as well as the firm’s resources and technological capabilities. So, in assessing the adequacy of your controls, you should review the volume of 529 plan business as well as consider incorporating IT personnel in your discussions about potential weaknesses and corresponding improvement opportunities.
Some other potential issues to consider:
- The training provided to both representatives and supervisors regarding the costs and benefits of the various 529 plans and share classes;
- The degree to which established firm procedures and controls are being followed and enforced. (For example, if a firm requires the completion of a form detailing the cost implications of various share classes in connection with certain 529 plan recommendations, are those actually being completed and reviewed for all such transactions?)
The items above are by no means an exhaustive list of considerations, but they will greatly support your firm’s efforts to work with your compliance and regulatory counsel to more fully assess your firm’s current practices and regulatory risks associated with the 529 plan business.
Next Steps
To the extent weaknesses are identified in a firm’s practices and supervision, the firm should then dive into assessing the associated impact on customers. That is – were customers placed in unsuitable plans? Did share class recommendations result in greater expense to clients than other available share classes? For its part, FINRA says that this analysis may be accomplished through a customer-specific analysis as to each customer or the employment of a statistically driven review to flag groups of possibly affected customers. Again, firms should incorporate key team members in designing and conducting such an analysis.
Whether it makes sense to self-report is a complicated, fact-driven assessment that is beyond the scope of this short post. However, it is critical that firms seek guidance from experienced regulatory counsel in making the decision to self-report under the initiative or ”roll the dice” that FINRA (or another regulator) won’t independently raise concerns. For now, it is important to note that any firm that wishes to take advantage of the initiative must identify itself to FINRA Enforcement before April 1, 2019.
In response to the announced initiative, all financial service firms, including both FINRA members and non-members, should assess their practices and controls regarding the recommendation of 529 plans. However, given the pending deadline, FINRA members in particular are strongly encouraged to engage in a thorough review and incorporate active scrutiny during the assessment process to best identify their regulatory risk and strongest path forward.