Brokerages pay $5 million in restitution for 529 plan violations

Six brokerages agreed to return more than $5 million to investors to settle Finra charges for recommending unsuitable share classes of a popular college-savings investment product.

The Financial Industry Regulatory Authority Inc. announced on Dec. 20 agreements with LPL Financial to pay restitution of $1,203,392, with Wells Fargo Advisors and Wells Fargo Advisors Financial Networks to pay restitution of $3,367,929, and with three Advisor Group firms -- Royal Alliance Associates, Sagepoint Financial and FSC Securities -- to pay restitution of $485,441.

Each of the brokerages avoided fines because they received credit from Finra for “extraordinary cooperation” with the broker-dealer self-regulator’s probes of their practices in selling 529 college-savings plans.

Finra found that each brokerage failed to put in place policies and procedures to ensure that their registered representatives were recommending 529 share-classes that fit customers’ investment objectives and timelines.

The investment vehicles are tax-advantaged municipal securities often sponsored by states that come in different share classes, some of which have a front-end sales charge but lower annual fees and others that don’t have a front-end charge but higher annual fees. Depending on how long a customer builds a college fund, some share classes are less expensive.

Finra did not impose fines on LPL and the Advisor Group firms because they self-reported through Finra’s 529 Plan Share Class Initiative, which was launched in 2019. Wells Fargo also avoided a penalty by working with Finra in its investigation, Finra said.

None of the firms admitted or denied the charges.

“LPL takes our supervisory obligations seriously,” the firm said in an emailed statement. “We have fully cooperated with Finra throughout this industry-wide self-reporting initiative and have implemented new policies, procedures, and training to strengthen our capabilities related to this important work.”

Wells Fargo also said it is looking ahead.

“Wells Fargo Advisors is pleased to have resolved this matter,” the firm said in an emailed statement. “We enhanced our supervisory policies related to 529 share class recommendations and are making payments to clients, with interest, related to share class fees.”

A spokesperson for Royal Alliance, Sagepoint and FSC could not be reached for comment.

Finra charged the brokerages with failing to recommend appropriate share classes and provide sales discounts for which customers were eligible.

From January 2013 to March 2020, LPL overcharged customers for rolling over 529 plans from one state to another because LPL reps did not apply appropriate sales charge waivers or use special share classes that reduced the costs of the transactions, Finra said.

“Out of a total of 21,433 rollover transactions, the firm failed to apply available sales charge waivers or recommend Class AR shares to 5,246 transactions with an aggregate principal value of approximately $28 million, which resulted in LPL overcharging customers $982,354 in front-end sales charges,” the Finra order states.

From January 1, 2013, through June 30, 2018, Royal Alliance, Sagepoint, and FSC shared written supervisory procedures that did not reasonably address suitability factors specific to 529 plan investments, according to the Finra settlement. The firms’ transaction review system did not “identify 529 plan share-class recommendations that were inconsistent with the investment time horizon suggested by the age of the account beneficiary.”

Between January 1, 2011, and December 4, 2016, Wells Fargo Advisors and Wells Fargo Advisors Network also fell short in aligning customers’ investment time horizons, the age of the beneficiary and the 529 plan share class, Finra said.