Wells Fargo, UBS, LPL and other firms settle flurry of FINRA cases

Just like a year ago at this time, FINRA is unveiling a flurry of cases under its 529 plan program and other settlements with ramifications for wealth managers.

In the past week alone, at least 13 firms settled 10 different FINRA cases while agreeing to pay more than $15 million in restitution and fines. After FINRA shared the first 19 cases under its self-reporting program on 529 plan share classes last December, the regulator added five more settlements with UBS, Wells Fargo, LPL Financial, MassMutual and three of Advisor Group’s firms. In an email to Financial Planning, FINRA staff confirmed that there are more 529 plan cases on the way. The sprint to the end this year with so many cases hitting the public database at once is business as usual, said Susan Schroeder, the vice chair of law firm WilmerHale’s securities and financial services department and FINRA’s former head of enforcement.

“FINRA reports the number of enforcement cases it brings every calendar year, so by December there is added incentive for FINRA to finalize outstanding enforcement cases to demonstrate its productivity,” Schroeder said in an email. “In reality, the number of enforcement matters that a regulator brings in a given year is not a very useful metric. A large number of cases does not necessarily mean the cases themselves are impactful, and a smaller number of cases may still accomplish significant investor and market protection if they effectively stop bad actors and address customer harm.”

The 529 plan program launched by FINRA in January 2019 seeks cooperation between wealth managers and other companies willing to self-report potential violations and pay restitution to harmed clients. State agencies and organizations offer 529 college savings plans to give clients the opportunity to invest on a tax-advantaged basis toward education for a child, grandchild or another beneficiary, according to the College Savings Plan Network. As of June 30, more than 15 million accounts nationwide had a combined $464 billion in assets, the nonprofit says.

Most of the cases revolve around the difference between Class C and Class A shares in 529 plans when it comes to their fees. Class C shares usually come without upfront sales charges but higher ongoing fees, while Class A products typically collect lower fees than other types of 529 plans but do collect a front-end expense, according to FINRA. For example, a $10,000 investment in Class C shares held by a client for 18 years would come with $1,300 in higher fees and an account value that’s $1,500 below that in Class A shares.

“Because of their higher annual fees, Class C shares may be more expensive over extended holding periods and, consequently, Class A shares are frequently the suitable option for accounts with younger beneficiaries and longer investment horizons,” FINRA investigators said in language included in several of the cases.

That’s why FINRA’s program will make a big difference to the affected clients, according to Nicole Iannarone, an assistant professor with Drexel University’s Thomas R. Kline School of Law and the current chair of FINRA’s National Arbitration and Mediation Committee.

“This is a very important initiative because many consumers won't notice what might be an individual, smaller amount of fees coming out of their account,” Iannarone said. “It can have an enormous impact. The importance of resolving this issue and giving the money back to investors, it can't be underestimated.”

Five of the 10 cases to become public in the past week come from FINRA’s self-reporting program. Out of the other five, three are supervisory cases, one cites a firm for failing to produce documents and another faults a firm for not reviewing correspondence. Merrill Lynch, Truist and other wealth managers and financial firms settled the cases without admitting or denying the allegations.

To see which firms FINRA has filed cases against and what the firms said in response, scroll down our slideshow.

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1. Truist predecessor SunTrust allegedly failed to review 950K electronic messages

For nearly five years prior to its merger with BB&T Bank to create Truist, SunTrust didn’t review hundreds of thousands of pieces of correspondence and internal communications in a timely manner, according to FINRA.

Truist agreed to pay a fine of $150,000 to settle FINRA’s case alleging its supervisory system let 855,770 flagged emails go without a review and didn’t adequately monitor 94,539 messages from hundreds of Bloomberg email messaging accounts between 2012 and 2017, according to the Dec. 21 letter of acceptance, waiver and consent.

Representatives for Truist declined to comment on the case.
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2. Advisor Group firms settle 529 plan case under FINRA’s self-reporting program

Three of the firms in Advisor Group’s independent brokerage network agreed to pay a combined $485,000 as part of FINRA’s self-reporting program on 529 plan share classes.

Royal Alliance Associates, SagePoint Financial and FSC Securities will pay the restitution and estimated interest to more than 400 accounts of clients who purchased unsuitable Class C shares between January 2013 and June 2018, according to their Dec. 20 letter of acceptance, waiver and consent. Each of the firms agreed to the settlement on Oct. 29, but FINRA didn’t formally accept it and post it on its public database until earlier this week, the document shows.

Representatives for Advisor Group didn’t respond to requests for comment on the case.
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3. Advisor Group’s SagePoint settles fourth FINRA supervision case in 4 years

SagePoint Financial failed to set up adequate supervision of its registered representatives who had prior histories of misconduct in their internal records, according to FINRA.

Citing its investigation of a former rep of the Advisor Group firm as prompting the case and a half dozen examples of advisors accused of misconduct such as conversion of client funds and forgery, FINRA ordered SagePoint to pay a fine of $700,000. Between 2013 and the present, SagePoint “failed to assign clear responsibility for imposing heightened supervision and discipline to specific personnel” and used “haphazard and fragmented” recordkeeping methods, according to investigators. For instance, the firm didn’t place 11 reps on heightened supervision who had a combined 110 disciplinary marks on their company records, FINRA says. Phoenix-based SagePoint has had three other relevant supervisory cases with FINRA since 2017, the Dec. 17 settlement’s “background” section shows.

Representatives for SagePoint parent Advisor Group didn’t respond to requests for comment on the case.
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4. MassMutual’s brokerage faulted for 529 plan share class and discount failures

MassMutual’s independent brokerage, MML Investors Services, is paying $744,000 to settle FINRA’s case alleging its 529 plan recommendations ran afoul of the rule in two ways.

MML recommended unsuitable Class C shares of 529 plans and failed to provide clients with the breakpoint discounts that they qualified for in certain mutual funds and college savings products, according to the Dec. 20 letter of acceptance, waiver and consent. The share-class failures were between January 2013 and March 2017, while the clients missed out on the discounts between July 2016 and October 2019, the settlement states. The case orders restitution to 553 accounts over the unsuitable share-class selection and payments to 9,428 accounts based on the missing breakpoint discounts.

MassMutual spokeswoman Chelsea Haraty noted that the firm self-reported the case to FINRA and will be providing restitution to the clients. “We are pleased to resolve this matter and put it behind us,” Haraty said in a statement.
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5. FINRA blames Merrill’s ACH transfer failures for $6 million in fraud losses

One of the largest wealth managers failed to set up a supervisory system that could have prevented fraud cases bilking its clients for millions of dollars, according to FINRA.

At least 13 clients of Merrill Lynch lost a combined $6.5 million in separate schemes carried out by three registered representatives because the wirehouse didn’t adequately supervise automated clearing house transfers between May 2013 and November 2018, according to the Dec. 20 letter of acceptance, waiver and consent. The firm missed more than 570 unauthorized ACH transfers executed by the reps, FINRA investigators said. Merrill Lynch has likely paid restitution to the affected clients through individual arbitration cases, and the regulator ordered the firm to pay a fine of $950,000 over the alleged supervisory failures.

Representatives for Merrill Lynch and parent Bank of America declined to comment.
Norway's Wealth Fund Buys Bank Of America Office In London For $944 Million
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6. Merrill Lynch fined $1.2 million over failure to produce documents

Merrill Lynch took two years or more to produce responsive documents to FINRA in investigations of former registered representatives, according to the regulator.

The wirehouse agreed to pay a fine of $1.2 million after FINRA alleged that Merrill Lynch failed its obligation to produce the documents under requests from the enforcement division between 2018 and 2020, the Dec. 20 letter of acceptance, waiver and consent states. In one example, a vendor destroyed the telephone records sought by investigators, according to FINRA. “These failures interfered with and delayed FINRA's investigations,” the settlement states.

Representatives for Merrill Lynch and parent Bank of America declined to comment.
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LPL Financial

7. LPL cited for botching front-end discounts in share class selection

For more than seven years, the nation’s largest independent brokerage saddled clients with unnecessary front-end sales charges on their investments in 529 plans, according to FINRA.

LPL Financial agreed to pay restitution of $1.2 million to the owners of 1,941 accounts who didn’t receive available waivers on their sales charges or Class AR shares that didn’t assess any when they rolled over their 529 plans from one state’s program to the next, the Dec. 20 letter of acceptance, waiver and consent states. LPL accepted the settlement on Oct. 8, while FINRA formally accepted it and made it public earlier this week.

“LPL takes our supervisory obligations seriously,” spokeswoman Shannon Green said in a 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.
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8. Midsize brokerage and CEO ordered to pay $1.7 million in FINRA supervision case

A midsize brokerage CEO’s manual daily review of transactions let a registered representative’s unsuitable trading go on for more than five years, according to FINRA.

Emerson Equity, which has 200 reps and a specialty in private placements, and the firm’s founder, Dominic Julio Baldini, failed to set up and enforce a supervisory system designed to ensure suitability in short-term mutual fund trades, the Dec. 22 letter of acceptance, waiver and consent states. The company must pay $1.6 million in restitution plus interest to clients who paid higher fees due to the rep’s trades, along with a $60,000 fine for the firm and a $5,000 fine assessed against Baldini. He also accepted a suspension of 20 business days.

Representatives for San Mateo, California-based Emerson Equity didn’t respond to requests for comment on the case.
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9. Wells Fargo must pay $3.9M over allegations of unsuitable Class C shares

Wells Fargo Advisors and the firm’s independent brokerage arm, Wells Fargo Advisors Financial Network, settled FINRA’s case on 529 plans about five years after the regulator alleges that it last ran afoul of the rules.

The firms agreed to pay restitution plus interest of $3.9 million to 4,912 accounts held by clients who incurred unnecessarily high fees when they purchased Class C shares between January 2011 and December 2016, according to the Dec. 20 letter of acceptance, waiver and consent.

“Wells Fargo Advisors is pleased to have resolved this matter,” spokeswoman Jackie Knolhoff said in a 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.”
UBS Group AG and Julius Baer Group Ltd. Bank Branches Ahead of Earnings
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10. FINRA hits UBS with $4.8M restitution order over Class C shares with ‘excess fees’

UBS is paying the largest amount of restitution ordered by FINRA so far in its ongoing 529 plan share class self-reporting program.

The wirehouse must pay restitution plus interest of $4.8 million to 5,897 accounts held by clients who purchased Class C shares between January 2013 and June 2018 with “excess fees” above those of Class A products, according to the Dec. 20 letter of acceptance, waiver and consent.

“We are pleased to have resolved this matter,” spokespersons Huw Williams and Erica Chase said in an email.
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