Transamerica to pay 529 plan customers as part of massive FINRA settlement

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Transamerica Financial Advisors has agreed to pay $321,167 in restitution as part of a settlement of Financial Industry Regulatory Authority charges that it failed to properly supervise its brokers selling shares of 529 plans.

TFA settled without either admitting or denying FINRA’s findings that the firm violated the Municipal Securities Rulemaking Board’s Rule G-27 on supervision. That’s on top of a much larger overall penalty totaling some $8.7 million in fines and restitution for conduct unrelated to municipal products.

“It is imperative that FINRA member firms selling variable annuities, mutual funds, and 529 plans exercise particular care and diligence in training and supervising those representatives who recommend them to customers,” said Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement. “FINRA will continue to fulfill its mission of investor protection by making sure harmed customers receive restitution.”

TFA said, "The matter concerns TFA registered representatives’ recommendations to certain clients relating to variable annuities, mutual funds, and 529 plans during varying periods from Jan. 1, 2009, through Nov. 15, 2016. Since this investigation began in 2015, TFA has enhanced its training, guidance, policies and procedures, and oversight of its registered representatives and has enhanced its disclosures to customers.

"The settlement impacts a very small number of the total number of customer accounts held by TFA between 2009 and 2016. FINRA has ordered restitution to 2,405 TFA customer accounts of approximately $4.4 million. This includes restitution of $438,239 that was already paid to 433 customers during FINRA’s examination regarding allowable fee waivers for mutual fund share class purchases. In addition, FINRA has assessed a fine of $4.4 million, bringing the total settlement to approximately $8.8 million."

FINRA examiners found that from May 1, 2010, through May 31, 2015, TFA “failed to reasonably supervise representatives’ recommendations to customers to purchase particular share classes of 529 savings plans.” Shares of 529 plans are classified as municipal securities, and business related to their purchases is subject to MSRB rules.

Named after Section 529 of the Internal Revenue Code, the tax-advantaged plans are designed to encourage saving for the future educational expenses of a designated person. They are sponsored by states, state agencies, or educational institutions. States offer 529 plans either directly, through designated broker-dealers, or both.

Shares of the plans are sold in different classes with different characteristics. Class A shares typically charge on the front-end but charge lower annual fees compared to Class C shares, which typically impose no front-end sales charge but impose higher annual fees.

“Because of their higher annual fees, C shares may be more expensive over extended holding periods and, consequently, A shares are frequently the suitable option for accounts with younger beneficiaries and longer investment horizons,” FINRA said.

“TFA did not provide adequate guidance to representatives regarding the importance of considering share-class differences when recommending 529 plans and failed to provide supervisors with the information necessary to properly evaluate the suitability of 529 share-class recommendations,” FINRA found.

Specifically, FINRA found that TFA’s policies did not instruct supervisors to consider either the age of the beneficiary or the number of years until expected withdrawals. MSRB Rule G-27 requires that firms maintain and enforce supervisory systems reasonably designed to ensure compliance with federal laws, regulations, and board rules.

FINRA said TFA would pay no fines related to the MSRB violation, only the restitution to the 831 affected customers.

"In resolving this matter without a monetary fine as to the MSRB rule violations, enforcement recognizes TFA’s extraordinary cooperation pertaining to the firm’s 529 plan violations," FINRA said. "The firm provided substantial assistance to FINRA in its investigation, including providing FINRA staff with detailed information about the challenges associated with collecting and assessing 529 plan data. Additionally, TFA engaged an outside consulting firm to conduct a complex analysis to identify potentially disadvantaged customers on an expedited basis."

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Enforcement actions FINRA 529 plans MSRB rules Transamerica Financial Advisors