In January of this year, FINRA launched an initiative to curb the sales of high cost 529 plan funds to investors. Specifically, they are reviewing the share classes recommended to these investors and if these recommendations met the suitability standard based on the profile of the client.
Originally the deadline for complying with this self-reporting initiative was April 1; however, it was recently extended to April 30. FINRA has indicated that there will be no fines for firms that step forward under this self-reporting phase.
As part of the regulatory notice related to this initiative, FINRA urges firms to review their supervisory systems and the procedures used to make share class recommendations to clients using 529 plans to save for college. Examples of deficient supervisory processes include the failure to:
- provide training regarding the costs and benefits of different 529 plan share classes;
- understand and assess the different costs of share classes for individual transactions;
- receive or review data reflecting 529 plan share classes sold; and
- review share-class information, including potential breakpoint discounts or sales charge waivers, when reviewing the suitability of 529 plan recommendations.
Data plays a significant role in 529 plans-related compliance. Without the proper data aggregation and reporting tools, firms will have difficulty finding 529 account plans that have a class C share mutual fund asset(s). The ease or complexity of doing so will depend on how robust your firm’s data aggregating and reporting capabilities.
Depending upon the relationships your broker-dealer has with various fund companies, custodians and trading platforms, you will need to pull all of this information together to determine which 529 funds were recommended and used for your firm’s various clients. Firms lacking robust data aggregation and compliance management tools will likely need to contact the carriers directly which is a time-consuming process.
Recordkeeping and Compliance
This exercise will tell you a lot about the strengths and weaknesses of your firm’s recordkeeping and compliance systems. Ideally, complying with requests like this shouldn’t be difficult. If this isn’t the case, perhaps your existing systems may need to be updated. Take time to review the ability of your system to adequately capture and monitor suitability data and 529 plan transactions.
As your firm goes through this self-reporting initiative, this will be a good test as to whether or not your system’s reporting capabilities are set to provide the reporting you need to manage compliance-related issues like this one. Typically, this type of purchase represents a small percentage of all 529 transactions. Without the right reporting tools, your firm would need to review transactions manually which would be a tedious undertaking—finding the proverbial needle in the haystack.
Now is the time to take a look at your firm’s data aggregation, recordkeeping, and reporting capabilities to help your firm move forward in today’s ever-changing regulatory environment.