FINRA Extends Deadline for Firms to Self-Report Violations under its 529 Share Class Initiative

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FINRA has extended the deadline for firms to self-report violations under its 529 Plan Share Class Initiative.

The Financial Industry Regulatory Authority (“FINRA”) announced on March 6, 2019, that it is extending the deadline for firms to self-report violations under FINRA’s 529 Plan Share Class Initiative to April 30, 2019. Participating firms must confirm their eligibility by submitting the additional evidence specified in Regulatory Notice 19-04 by May 31, 2019. In addition, FINRA has published a set of frequently asked questions about its 529 Plan Share Class Initiative in response to inquiries it has received from firms and trade associations.

On January 28, 2019, FINRA issued Regulatory Notice 19-04 and announced its “529 Plan Share Class Initiative.” According to the Notice, the purpose of the 529 Plan Share Class Initiative is to allow firms the opportunity to self-report violations related to recommendations that customers of 529 plans purchase shares in classes that carry expenses that are higher than the expenses charged by otherwise identical funds offered by the same issuer.

A 529 plan is a popular investment vehicle that allows individuals to invest money for the educational expenses of a designated beneficiary. According to FINRA’s Regulatory Notice, Class A shares typically impose a front-end sales charge, but lower annual fees compared to other classes. Class C shares typically impose no front-end sales charge but carry higher annual fees than Class A shares. These classes may have a different cost impact on the customer depending on the length of time the customer holds the securities. For most long-term investors, the fees charged by Class C share funds over the life of the investment will be greater than if the customer had purchased Class A shares. FINRA’s Notice suggests that the break-even point may be six or seven years, meaning that when assets are expected to be invested for more than six to seven years (for example, in a 529 plan purchased for the future college expenses of a beneficiary who is 12) an A share fund might be the more cost-effective choice.

FINRA’s Department of Enforcement will recommend that FINRA accept favorable settlement terms for firms that self-report violations and provide FINRA with a detailed remediation plan. FINRA anticipates that the settlement of a self-reported violation will include restitution to customers for the financial impact of the higher-cost share class and a censure, but no fine. Recommended settlements will also include either an acknowledgment that the firm has or will voluntarily undertake corrective actions.

© Andrew Whiteman 2019


The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Please contact us for more information.



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