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FINRA in ‘phase one’ of 529 self-reporting program

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WASHINGTON, D.C. — Broker-dealers are making their opinions well-known to FINRA about its program allowing them to self-report potential violations of the rules around recommendations of 529 savings plans.

Just ask the official who was surprised to learn his name and phone number appeared on the January regulatory notice announcing it: Chris Kelly, FINRA’s senior vice president of sales practice enforcement.

“Trust me when I say that we’ve heard you,” Kelly said in a panel before around 75 BD executives and compliance staff at FINRA’s annual conference. “I’ve heard all of the responses to the 529 initiative.”

The self-reporting program followed FINRA’s sweep of sales charge waivers it said more than 35 firms failed to provide on mutual funds over nearly a decade, resulting in more than $80 million in combined restitution over the past five years.

It also came after the SEC’s self-reporting program on disclosure of 12b-1 fees charged by RIAs and brokerage-affiliated RIAs, which led to 79 firms settling their cases for some $125 million in March. Brokerage firms didn’t jump at the opportunity for a program looking into the college savings plans spanning more than 13 million accounts and nearly $330 billion in assets.

FINRA responded to the feedback by posting a detailed list of questions and responses about the program and pushing back the deadline to self-report by 30 days to April 30. However, it remains unclear whether it will prove as far-reaching as the sweep or the SEC program.

“I’ve been answering questions almost on a daily basis,” Kelly said after a panelist from LPL Financial asked whether firms that self-report will definitely be subject to an enforcement action.

Kelly said it was “absolutely not” the case, citing a cautionary action letter or no action whatsoever as possibilities.

“And now that we’re sort of in phase one of the self-reporting initiative,” Kelly said, “we’re actively engaged in a dialogue with firms and answering these exact questions you talked about.”

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The tax-advantaged municipal securities came under FINRA scrutiny because officials were concerned that some firms didn’t ensure their representatives were recommending a 529 plan share class “that is tailored to the unique circumstances and needs” of each client, the regulator said.

FINRA Head of Enforcement Susan Schroeder — who unveiled the program in January and has since filmed two videos seeking to explain it to FINRA’s 3,600 members — put Dean Jeske, an associate general counsel at LPL, on the spot in an amusing moment in the otherwise dry panel.

“Dean, let’s talk about the 529 initiative,” Schroeder said. “We’ve gotten a lot of feedback about that initiative. What was your reaction and what do you want to tell us?”

The former deputy regional chief counsel in FINRA’s midwest regional enforcement unit paused for a moment and laughed at the direct question. He called the 529 program a good idea “conceptually” and contrasted its approach with FINRA’s mutual-fund waiver sweep.

“That was like this initiative, except it wasn’t formally announced, so I think it’s a good thing to get that out there so that the industry knows about it,” Jeske said. “This is obviously the first time FINRA’s done it, so I think some of the reaction was just, this is new and different and firms and the industry weren’t sure exactly what it meant.”

Jeske also had questions as to how broad firms’ reviews of their practices needed to be under the program, and he quizzed the FINRA officials on whether firms’ participation would result in enforcement cases against them “if it’s not a broader more systemic problem.”

“So I’ll stop there,” he added, “and then see if I can get an answer to that one.”

Kelly answered Jeske’s question, noting it had also been covered in the FAQ earlier in the year. After the panel, representatives for FINRA said it was too early in the process to know any timelines for possible enforcement cases and the potential reach of the self-reporting program.

“It’s been a learning experience for us too,” Kelly said on the panel. “We understand that it’s now on us to show what we say is true and to prove what we said we’re going to follow up on.”

Jeske asked him whether there are any other issues he thought FINRA might take up with a similar type of program in the future.

“Let’s get through this one first,” Kelly said.

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