Securities America, Royal Alliance and SagePoint will collectively pay hundreds of thousands in restitution to settle disciplinary charges with the Financial Industry Regulatory Authority (FINRA); but the regulator declined to fine the firms, citing their “extraordinary cooperation.”
Securities America, Royal Alliance and SagePoint are all subsidiaries of Advisor Group, a large network of independent broker/dealers. In the charges, FINRA detailed how the firms allegedly didn’t have supervising systems in place to make sure eligible customers got applicable sales charge waivers and share classes deals when rolling over 529 plans between state plans.
Legally known as qualified tuition plans, 529 plans are tax-advantaged securities that encourage saving for future education expenses. They’re sponsored by states, state agencies or educational institutions, according to the Securities and Exchange Commission (SEC). States offer them directly or through b/ds, and 529 plan shares often can be sold in different classes with identical aims but different fee structures.
Between Sept. 2015 and 2020, the three b/ds offered clients more than two dozen different 529 plans; during that time, at least 20 of these plans offered to waive sales charges when investors rolled over their shares between states, or would offer a separate share class which was designed specifically for such situations and didn’t include a sales charge for state-to-state rollovers.
But according to FINRA, the procedures at Securities America, Royal Alliance and SagePoint neither highlight these options for clients, nor offered training for registered reps. Instead, the firms relied on reps to know whether the waivers or separate share class options were appropriate.
This lack of training meant that the firms weren’t applying waivers or alternate share class purchases in numerous situations where they would have saved clients money. Securities America failed to do so in 38% of its 529 plan rollovers, affecting about 250 accounts with purchases totaling about $4 million, while Royal Alliance didn’t do so in 41% of its rollovers, hitting about 500 accounts making purchases of around $7 million.
In SagePoint’s case, the firm didn’t offer the alternatives for about 56% of the rollovers, affecting about 260 accounts with purchases totaling about $5.3 million. In all, customers at the three firms paid about $515,000 in unnecessary charges.
The regulator censured the firms and ordered restitution payments of $122,845.59, $234,831.92 and $156,903.93 for Securities America, Royal Alliance and SagePoint respectively. But, FINRA decided not to include monetary fines because the firms started an internal investigation before the regulator began investigating, including hiring an outside consultant to find affected clients and creating a plan to calculate overcharges and pay restitution.
It was mildly surprising there were no additional fines, according to Sander Ressler, a managing director of Essential Edge Compliance Outsourcing Services. But he was more intrigued that FINRA cited “extraordinary cooperation” as the reason for no penalties.
“I think, for many years, FINRA has always said ‘cooperate with us and we’ll give you some leniency, and I don’t think the industry has ever seen that leniency,” Ressler said. “FINRA may have taken the opportunity to use this as something they could point to in the future and say ‘see, cooperate with us and we’ll go easier on you.’”
According to FINRA guidance, in the case of a firm offering “extraordinary cooperation,” the regulator might determine that no enforcement action is necessary if the problem’s been remediated. But in situations where FINRA determines action is required, they may respond by reducing sanctions.
“When credit is given in the form of a reduced fine, the reduction normally will be substantial,” the guidance reads.
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