The Financial Industry Regulatory Authority has ordered restitution totaling $515,000 be paid to clients of Securities America, Royal Alliance and Sagepoint, three subsidiaries of the Advisor Group, one of the nation’s largest networks of independent broker-dealer firms, and censured the firms for failing to establish and maintain supervisory systems to ensure that all eligible customers received applicable sales charge waivers or special share classes in connection with rolling over 529 plans from one state plan to another. The alleged violations occurred between September 2015 and September 2020, according to FINRA.
FINRA ordered Royal Alliance to make restitution of $234,831.92 to clients, while ordering Securities America to pay $122,845.59 and SagePoint to pay $156,903.93. The firms also received a censure.
The action is related to future educational expenses of a designated beneficiary known as 529 plans, which offer tax advantages for people saving to pay for educational expenses. These plans are sponsored in all 50 states, which offer them directly or through broker-dealers, and come with different share classes that have different fee structures. According to FINRA, Class A shares typically 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 explains that some 529 plan product sponsors waive sales charge for investors who roll their current 529 plan from one state’s 529 plan into another state’s 529 plan, either by waiving the sales charges on Class A shares or by offering a special share class, Class AR, which is meant specifically for 529 plan state-to-state rollovers and has no upfront sales charge. Class AR shares are subject to a contingent deferred sales charge within the first year and, initially, have annual fees similar to a Class C share but convert to Class A shares after a predefined length of time, usually one year.
According to a FINRA-issued letter of acceptance, waiver, and consent, each firm offered customers between 29 and 34 different 529 plans. At any given time, at least 20 of those plans offered state-to-state rollover Class A share sales charge waivers or Class AR shares.
Yet, according to FINRA, the firms’ written supervisory procedures did not alert firm personnel of the potential availability of Class A sales charge waivers or Class AR shares for 529 plan rollovers and the firms did not offer training to registered representatives on this subject.
Allegedly, instead, the firms relied upon their registered representatives to determine whether sales charge waivers or Class AR shares on 529 plan rollovers were available, and to then complete the required forms to ensure that customers received those benefits. They also failed to provide supervisors with guidance or training on how to review 529 plan rollover transactions to identify Class A sales charge waivers or Class AR shares.
As a result, Securities America supposedly failed to apply sales charge waivers or purchase Class AR shares in approximately 38% of 529 plan rollover transactions, impacting approximately 250 accounts in which rollover purchases totaled approximately $4 million. This caused customers to unnecessarily pay approximately $120,000 in sales charges and fees.
FINRA claimed Royal Alliance failed to apply sales charge waivers or purchase Class AR shares in approximately 41% of 529 plan rollover transactions, impacting approximately 500 accounts in which rollover purchases totaled approximately $7 million. This caused customers to unnecessarily pay approximately $235,000 in sales charges and fees.
SagePoint reportedly failed to apply sales charge waivers or purchase Class AR shares in approximately 56% of 529 plan rollover transactions, impacting approximately 260 accounts in which rollover purchases totaled approximately $5.3 million. This caused customers to unnecessarily pay approximately $160,000 in sales charges and fees.
FINRA noted that each of the firms provided “extraordinary cooperation” in the matter, thus resulting in no fines being issued.
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