529 Plan Share Class Initiative Costs Morgan Stanley $1.7M in Restitution
- Belite Capital
- Dec 31, 2020
- 2 min read
“The purpose of the 529 initiative is to remedy potential supervisory and suitability violations related to 529 plan share-class recommendations, and to return money to harmed investors as quickly and efficiently as possible,” - Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement
Today, FINRA made a voluntary announcement of its initial results for the 529 Initiative: $2.7 Million in restitution and interest across 3,900 accounts between 19 firms. Morgan Stanley Smith Barney LLC will pay $1.7M to customers who incurred excess fees in their 529 plan accounts. FINRA found that the firm's supervisory system was not adequate for certain legacy accounts with 529 plan share-class recommendations or direct transactions made with 529 plans. While their supervisory system integrated "grids" to the OES for identifying appropriate share-class selection, they failed to integrate those grids with certain legacy account systems until 2016. For transactions made directly with 529 Plans, the firm did not have a process to check if the grids were applied at all.
B. Riley Wealth Management Inc. (BRWM) also agreed to settle with $250,000 in restitution and interest based on their failure to have supervisory procedures for its 529 business. They lacked adequate guidance to registered representatives or supervisors, and a supervisory system for transactions made directly with 529 Plans.
Both Morgan Stanley Wealth Management and BRWM voluntarily disclosed this information through the Initiative, and have agreed to provide restitution to certain customers with class C shares in accounts with young beneficiaries to long-term time horizons, along with implementation of additional supervisory controls.
529 Plans are:
- Tax-advantaged municipal securities
- Designed to save for future educational expenses of the beneficiary
- Often sold in different classes with different fee structures
- Certain share classes may be significantly less expensive when held for an extended period, making them frequently a more cost-effective choice for accounts: with younger beneficiaries and longer investment horizons, or that qualify for breakpoint discounts.
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