As part of its routine examinations, FINRA will often coordinate with the MSRB to ensure its members are complying with applicable rules. MasterComplaince is posting this blog to remind MSRB members of their obligations and to share recent inquiries.

Share Class Testing

As noted in FINRA Regulatory Notice 19-04, FINRA launched a 529 Plan Share Class Initiative in 2019 to promote firms’ compliance with the rules governing 529 plan recommendations. In the aftermath of this initiative, FINRA is examining firms to look for potential supervisory and suitability violations related to recommendations regarding 529 plans. While all share classes have their advantages and disadvantages, FINRA and the MSRB typically scrutinize C-share class funds more than others. If you offer 529 plans, you can be proactive:

  1. Complete share class testing for all accounts, including accounts held directly with plan sponsors.
  2. Review your new account forms to look for patterns. Generally speaking, C-shares are not appropriate for young children. When C-shares are recommended, firms should provide sufficient detail to indicate why this is in the client’s best interest.
  3. Review your disclosures to ensure the share class variances are appropriately disclosed. Consider updating your disclosures or requiring signed acknowledgments for all C-share purchases.
  4. Consider your systematic investments and ensure the share class selected is still appropriate.
  5. Contact the fund company to request share class conversions, if applicable.

Annual Disclosures

Under MSRB Rule G-10, amended in 2017, firms are required to provide customers a notice once every calendar year. The notice may be sent electronically or through the mail. The annual disclosure provides information to customers on how to access the MSRB Investor Brochure. Review your annual disclosures to ensure customers are receiving this required disclosure, including 529 plan customers and municipal bond holders.

Initial Disclosures

Under MSRB Rule G-17, members are required to disclose all material facts about a transaction at or prior to sale. Firms must document their disclosure delivery, unless the customer is a Sophisticated Municipal Market Professional in which case an institutional suitability certification should be on file.

Ongoing Disclosures

Under MSRB Rule G-17, which is applicable to customers who hold 529 plans and municipal bonds or other securities, members have an ongoing obligation to keep customers informed about material events. This obligation requires firms to promptly forward events as they are posted to MSRB’s Electronic Municipal Market Access system (EMMA). Firms must document their disclosure delivery, unless the customer is a Sophisticated Municipal Market Professional in which case an institutional suitability certification should be on file.

The information above is provided in summary form and is not inclusive of all MSRB rules, but it is indicative of the exam priorities seen during current FINRA exams. For more information, consult MasterSupervision, your Firm’s procedures, or the MSRB Rulebook.