Merrill Lynch, Raymond James will pay $12 million in 529 plan restitution
Merrill Lynch, Pierce, Fenner & Smith Inc., Raymond James & Associates Inc., and Raymond James Financial Services Inc. have agreed to pay about $12 million in restitution to settle charges that customers incurred excess fees on their investments in 529 plans.
The Financial Industry Regulatory Authority announced the settlement Wednesday, in which the firms neither admitted nor denied FINRA's findings that they violated the Municipal Securities Rulemaking Board's Rule G-27 on supervision for a nine-year period between the start of 2008 and March 2017 in Raymond James' case and from 2002 until 2007 in Merrill's case.
"FINRA member firms must be cognizant of all costs to their customers when recommending a product," said Jessica Hopper, senior vice president and acting head of FINRA's Department of Enforcement. "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."
529 plans are tax-advantaged municipal securities regulated by the MSRB that are designed to encourage saving for the future educational expenses of a named beneficiary. The plans are sponsored by states, state agencies, or educational institutions. States offer them either directly, through designated broker-dealers, or both.
Shares of 529 plans are available 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, while Class C shares usually impose no front-end sales charge but impose higher annual fees. 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, FINRA explained in a release.
Rule G-27 requires firms to have written supervisory procedures "reasonably designed" to ensure compliance with the securities laws and MSRB rules, but FINRA found that the firms' WSPs did not properly address the suitability obligations firms have. For example, FINRA found, Raymond James' WSPs did not instruct supervisors to evaluate beneficiary age nor address the difference in share classes.
Merrill's WSPs contained some of that, FINRA found, but were still lacking.
"Although registered representatives obtained birthdates of the 529 plan beneficiaries as part of the account opening process, the firm's supervisory system 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 available unit classes, to assess the reasonableness of the unit class recommendation," FINRA found.
Raymond James' share of the restitution is about $8 million. The investigations began before the advent of FINRA's 529 violation self-reporting program announced in January, but Raymond James nonetheless cooperated over many months, the firm said.
"As part of an industry-wide review of share class selection in 529 savings plans and related supervision, and after many months of extensive cooperation with FINRA, Raymond James has agreed to a settlement where it will credit current and former eligible clients, including interest," a firm spokesperson said. "The firm’s policies and processes were previously enhanced to address the issues in FINRA’s findings, and the remediation costs have been fully reserved. The firm is pleased to have resolved this matter."
Bank of America/Merrill Lynch also said it cooperated with FINRA.