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FINRA orders Merrill, Raymond James to pay clients $12M over 529 plan recommendations

FINRA ordered Merrill Lynch and Raymond James to pay clients a combined $12 million for oversight failures with regard to 529 plans.

The regulatory action comes amid stepped-up scrutiny of 529 plan recommendations in brokerages. Earlier this year, FINRA launched an initiative to encourage firms to self-report regulatory violations with regard to the plans, increasingly popular vehicles for saving for college and other educational expenses.

FINRA noted, however, that the issues prompting this week’s restitution predated the self-reporting program: That Merrill Lynch and Raymond James had failed to ensure that their brokers considered various fee structures when making recommendations to clients, “particularly for accounts that had young beneficiaries and long-term investment horizons,” FINRA said in a press release.

Further, the firms lacked proper written supervisory procedures for oversight of share class recommendations and their systems did not require brokers to evaluate beneficiary age and the number of years until expected withdrawals, the regulator said.

"FINRA member firms must be cognizant of all costs to their customers when recommending a product,” Jessica Hopper, acting head of FINRA's department of enforcement, said in a statement. “This is particularly important where an unsuitable recommendation may cause customers to incur higher fees year after year, especially in the case of young beneficiaries.”

Failures occurred at both the employee and independent broker-dealer units at Raymond James, according to FINRA.

Raymond James’ two BDs were designated broker-dealers for 40 states, according to FINRA. Merrill Lynch served as a distribution agent for 529 plans sponsored by 19 states.

With college and university tuition costs continuing to soar, 529 plans have become increasingly popular with parents and students. Clients have invested more than $352 billion billion in the plans as of June, according to data from the College Savings Plan Network, an affiliate of the National Association of State Treasurers. That’s up from $311 billion for the prior year and a big increase from the $133 billion reported for 2008.

Of the restitution FINRA ordered, Merrill Lynch will pay approximately $4 million, according to the regulator. Raymond James will pay more than $8 million for its employee and independent BD units.

"This is related to a matter that Merrill self-reported to FINRA in June 2015," a Merrill Lynch spokesman said in a statement. "Even prior to FINRA’s involvement, Merrill implemented corrective measures, including enhanced policies and procedures to ensure clients receive the most appropriate shares in their accounts."

FINRA headquarters

A Raymond James spokeswoman said the firm was pleased to have the matter resolved.

“As part of an industrywide review of share class selection in 529 savings plans and related supervision, and after many months of extensive cooperation with FINRA, Raymond James has agreed to a settlement where it will credit current and former eligible clients, including interest. The firm’s policies and processes were previously enhanced to address the issues in FINRA’s findings, and the remediation costs have been fully reserved,” she said in a statement.

In settling the matter with FINRA, the firms neither admitted nor denied the charges.

The regulator credited the two companies with “extraordinary cooperation.”

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