RBC Capital Markets LLC. has agreed to pay $685,520 in restitution to settle charges that it violated a supervisory municipal securities rule after the Financial Industry Regulatory Authority found it didn't establish a supervisory system when advising customers on 529 plans causing those customers to incur excess fees.
FINRA announced the settlement this week, in which RBC agreed to a censure while neither admitting nor denying FINRA’s findings that it violated Municipal Securities Rulemaking Board Rule G-27 on supervision.
RBC’s supervisory system was not reasonably designed, FINRA said, since the firm didn’t give enough guidance to representatives regarding the importance of considering share-class differences when recommending 529 plans. RBC also did not give supervisors adequate guidance to evaluate the suitability of 529 share-class recommendations, FINRA said.
Notably, RBC was not fined and FINRA credited the firm with its cooperation.
“RBC proactively initiated a review of its supervisory systems and procedures applicable to 529 plan recommendations, promptly corrected supervisory deficiencies it identified during that review, and established a plan to provide remediation to affected customers,” FINRA said.
From January 1, 2008 to July 21, 2016, RBC failed to establish and maintain a supervisory system to supervise representatives’ recommendations to customers to buy certain share classes of 529 savings plans, FINRA said. During that time, RBC was a designated broker-dealer for 30 state-sponsored 529 plans. About $930 million of RBC customer assets were held in those 529 plan accounts, FINRA said.
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 sold in different classes with different fee structures. For example, Class A shares tend to 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, FINRA said.
“The cost of a Class A share versus a Class C share can be meaningful for a retail investor,” FINRA said. “For example, applying the fee structure of one 529 plan commonly sold by RBC during the relevant period, a customer who initially invested $10,000 in Class C shares and held those shares for 18 years would pay approximately $1,300 more in fees and expenses than if the customer had invested the same amount in Class A shares.”
In this settlement, restitution was ordered for customers that incurred excess fees due to their investments in Class C shares estimated at $685,520, plus interest.
In October 2016, RBC updated its supervisory systems and procedures regarding 529 share-class recommendations, FINRA said.
RBC said, "With respect to this particular issue, RBC WM began a review of its systems, procedures, and affected accounts prior to FINRA beginning its industry-wide review. FINRA publically recognized RBC WM’s extraordinary cooperation with and assistance to FINRA in connection with its review."
