Financial Industry Regulatory Authority (FINRA) Orders Merrill Lynch, Pierce, Fenner & Smith Inc., Raymond James & Associates, Inc., and Raymond James Financial Services, Inc. to Pay More Than $12 Million in Restitution to Customers for Supervisory Failures Involving 529 Plan Share Classes.
FINRA has announced that Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), Raymond James & Associates, Inc. (RJA), and Raymond James Financial Services, Inc. (RJFS) have agreed to pay a total of approximately $12 million in restitution to customers who incurred excess fees on their investments in 529 savings plans based on the firms’ failures to reasonably supervise 529 plan share-class recommendations. Merrill Lynch has agreed to pay restitution of at least $4 million relating to the sale of Class C shares to 529 plan accounts with young beneficiaries. RJA has agreed to pay more than $3.8 million in restitution and RJFS has agreed to pay $4.2 million in restitution.
These matters pre-date FINRA’s 529 Plan Share Class Initiative announced in January, which encouraged member firms to voluntarily self-report potential violations relating to 529 plans.
529 plans are tax-advantaged municipal securities that are designed to encourage saving for the future educational expenses of a designated beneficiary. 529 plans are sponsored by states, state agencies, or educational institutions. States offer 529 plans either directly, through designated broker-dealers, or both. Because 529 plans are municipal securities, the sale of 529 plans are governed by the rules of the Municipal Securities Rulemaking Board.
Shares of 529 plans are sold in different classes with different 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 impose no front-end sales charge but impose higher annual fees than Class A shares. Because Class C shares may be more expensive over extended holding periods, Class A shares are frequently a more suitable option for accounts with younger beneficiaries and longer investment horizons (and/or accounts that qualify for breakpoint discounts).
Both Merrill Lynch and the Raymond James firms failed to ensure that registered representatives considered the various fee structures when making 529 plan recommendations to customers, particularly for accounts that had young beneficiaries and long-term investment horizons. Specifically, FINRA found that Merrill Lynch and the Raymond James firms failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to supervise recommendations of share classes of 529 plans. The firms’ supervisory systems did not require registered representatives or supervisors to evaluate beneficiary age and the number of years until expected withdrawals, combined with the different fees and expenses of the share classes, when making share-class recommendations.
Jessica Hopper, Senior Vice President and Acting Head of FINRA’s Department of Enforcement, said,
“FINRA member firms must be cognizant of all costs to their customers when recommending a product. This is particularly important where an unsuitable recommendation may cause customers to incur higher fees year-after-year, especially in the case of young beneficiaries. Returning money to harmed investors as quickly and efficiently as possible remains a priority.”
In determining the appropriate monetary sanction, FINRA recognized Merrill Lynch, RJA, and RJFS’s extraordinary cooperation.
In settling this matter, Merrill Lynch, RJA and RJFS neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.