The new year is bringing renewed focus to mutual fund share class disclosure, and regulators’ continued crackdown on funds that include
12b- 1 fees — with one compliance expert
predicting such fees are on their way out.
In late January, the Financial Industry
Regulatory Authority followed the
Securities and Exchange Commission’s
lead in putting a razor sharp focus
on share class recommendations that
include 12b- 1 fees.
On Jan. 28, FINRA launched a program to allow broker-dealers to self-report share class disclosure violations
related to 529 college savings plans,
similar to the self-reporting program
launched by the SEC last February.
The 529 Plan Share Class Initiative, as
set out in Regulatory Notice 19-04, states
that over the past several years, FINRA
has found that some firms have failed
to reasonably supervise brokers’ recommendations of multi-share class products.
As with mutual fund share class concerns, FINRA states that it has raised
concerns specifically regarding firms’
supervision of share-class recommendations to customers of 529 savings plans.
Shares within 529 plans are commonly sold in different classes with differing fee structures, FINRA explains,
with Class A shares typically imposing a
front-end sales charge but lower annual
fees compared with other classes. Class
C shares typically impose no front-end
sales charge but impose higher annual
fees than Class A shares.
Susan Schroeder, head of FINRA’s
enforcement division, stated in a video
message that if firms self-report via
the initiative, “a settlement under
this initiative would be a supervisory
settlement and would not trigger” a
To encourage voluntary reporting,
FINRA will accept favorable settlement
terms for firms that self-report these
potential violations and provide FINRA
with a detailed remediation plan.
To be eligible for the initiative, firms
must self-report by providing written
notification to FINRA Enforcement by
noon on April 1. A firm that has timely
self-reported must, by May 3, 2019, confirm its eligibility for the 529 Plan Share
Class Initiative by submitting information for the period of January 2013
through June 2018.
Schroeder explained that FINRA is
concerned about 529 plans because they
“are incredibly important investment
vehicles for a lot of Americans who are
trying to save for the education of ben-
eficiaries like their children.”
FINRA has learned through reviewing
“some firms’ 529 plan sales that this can be
a blind spot for some firms,” she continued.
Addressing the question of whether
FINRA, through the crackdown, believes
that C shares are “never suitable,” or are
“always unsuitable” for younger benefi-
ciaries, Schroeder said: “Absolutely not.”
FINRA “is not saying there is any
‘per se’ unsuitability about C shares,”
Schroeder said. “In fact, with the recent
revision of the tax laws, it’s even more
complicated because you can use 529
plans under some circumstances for edu-
cational expenses before college. It real-
ly underscores the need to understand
each investor’s particular circumstances
and objectives to make sure the recom-
mendation is suitable for that investor.”
The advent of FINRA’s disclosure ini-
tiative, however, does not signal the end
THE PLAYING FIELD
By Melanie Waddell
Regulators Take Aim at Share Class Disclosure
Attorneys and compliance experts see the SEC and FINRA crackdowns as
a ‘big deal’ that foretells the demise of 12b- 1 fees.
As with mutual fund
share class concerns,
FINRA states that it
has raised concerns
to customers of 529