California broker to pay 529 rollover customers in FINRA settlement

A San Diego-based broker dealer has agreed to pay a fine and restitution to settle claims it failed to properly supervise its brokers selling shares of 529 plans for customers looking to roll over the investments from one state plan to another.

Independent Financial Group, LLC settled the charges with Financial Industry Regulatory Authority over alleged violations of Municipal Securities Rulemaking Board Rule G-27 on supervision and the Securities and Exchange Commission’s Regulation Best Interest Compliance Obligation, which requires broker-dealers to act in the best interest of a retail customer when making recommendations of any securities transaction.

As is typical in FINRA settlements, the firm neither admitted nor denied FINRA’s findings.

Section 529 plans are set up by states, state agencies or educational institutions, under Section 529 of the Internal Revenue Code for parents or others to invest funds used to pay for college for children or other beneficiaries. The interests from these funds are considered to be municipal securities and are called municipal fund securities, which is why brokers dealing with them are subject to MSRB rules.

FINRA’s 529 initiative was launched in 2019. The agency encouraged firms to review their supervisory practices regarding 529 plan share-class recommendations and “self-report potential violations of applicable rules, describe and demonstrate past or future corrective actions, and provide FINRA with a plan to remediate harmed customers.”

The effort has led to several settlements. The IFG settlement was not self-reported.

Shares of the 529 plans are sold in different classes with different characteristics. Class A shares typically charge on the front-end but charge lower annual fees compared to Class C shares, which typically impose no front-end sales charge but impose higher annual fees.

FINRA’s settlement with IFG stemmed from a review of whether customers who rolled over their plans were receiving available front-end sales charge waivers or Class AR shares.

FINRA said that from September 2015 through the present, IFG “failed to establish and maintain a supervisory system reasonably designed to supervise registered representatives’ recommendations to customers that they rollover 529 savings plan investments from one state plan to another.”

IFG twice revised its 529 plan rollover procedures, in 2022 and 2023, but both efforts “failed to articulate the firm’s policy for providing customers with available sales charge waivers or special share classes,” FINRA said.

As a result, from 2015 through the present, the firm “failed to consistently apply available sales charge waivers, impacting at least 18 customers in which total rollover dollars totaled at least $837,000,” FINRA said. “This resulted in at least $17,000 in sales charges and fees that, had the waiver been granted, would not have been charged.”

As part of the settlement, the firm agreed to a censure, to pay a $75,000 fine — $50,000 of which pertains to the violation of MSRB Rule G-27 — and to pay restitution plus interest to current and former customers who qualified for but did not receive sales charge waivers or Class AR shares in connection with the rollovers.

The firm also agreed to hire a third-party consultant to review compliance with the affected regulation, identify affected customers and how much they are owed, and submit the consultant’s report to FINRA.

IFG did not return requests for comment by press time. The privately held firm has approximately 650 registered representatives and 380 branch offices.