In my 30+ years of being a compliance professional, it’s rare to see FINRA ask its members to do a mea culpa like this. Self-disclosure isn’t unusual for FINRA. What is unusual, though, is asking firms to identify and voluntarily self-disclose any suitability issues with share class recommendations made in the last five and a half years.
FINRA is asking its member firms to quickly identify any suitability issues in 529 accounts (college savings plans) where the recommendations made were inconsistent with the investor’s investment objectives. This falls squarely under FINRA Rule 2111, as well as Municipal Securities Rule Making Board (MSRB) Rule G-19 suitability obligations. And why the MSRB you may ask? Because 529 plans are actually municipal securities.
Let’s discuss this five-and-a-half-year review. As much as identifying specific issues and fixing them is important, the exercise is being used by FINRA to help firms highlight supervisory failures then set supervisory procedures and conduct RR education. So what can you do to show FINRA you’re facing the problem head-on? I’ll warn you that my advice involves diving into your firms’ books and records system data, which can get messy.
Shares in 529 plans are typically sold with different share classes that have various fees or charges. Class A shares usually have front-end sales charges but charge lower annual fees. Class C shares usually have no front-end sales charges but have higher annual fees so the charges and fees depend on the length of time the investor holds the securities when assessing suitability. Knowing the age of the beneficiary and when the money will be needed (the time-horizon) to pay for that college education is a vital data point.
Having a clear way to identify and differentiate between mutual fund classes will also be part of the data sleuthing process. You’ll need to be able to extract transactions in the 529 accounts from your clearing firm data, as well as the recorded investment objectives of the account. Leveraging tools like Microsoft Excel or preferably, if you use RegTech surveillance software and can enlist the help of your provider, will help you more easily identify the accounts and transactions.
Let’s do a quick recap on those required data points. You need a clear view of historical account and trade information that includes:
- account type
- beneficiary date of birth
- time horizon
- investment objectives
- trade dates
- transaction details
- security type and details
- sales charges or fees
I would strongly recommend reviewing FINRA’s Regulatory Notice 19-04 as well as the FAQ’s for this initiative first before jumping in. And one last thing... you have until April 30th 2019 to demonstrate that you have put a supervisory process in place, which becomes part of your Written Supervisory Policies.