March Madness for RIAs - Form ADV Annual Update and FINRA Hops on Share Class Bandwagon: Regulatory Update for March 2019

Hardin Compliance Consulting LLC

For Investment Advisers: SEC Actions

Reminder: The deadline for filing the Form ADV update for investment advisers with a fiscal year end of December 31 is March 31, 2019, which is a Sunday.   IARD will be open on Sunday, March 31 from 10am-6pm Eastern Time. Therefore the deadline for filing an annual updating amendment will NOT be extended to Monday, April 1, 2019.  And check out our latest blog post for tips on updating the Form ADV.  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant

Overwhelmed by the Annual Review?  We’ve made it easy.  Check out our guide to writing the best annual compliance program review ever!  Contributed by Jaqueline M. Hummel, Partner and Managing Director

For Broker-Dealers:  FINRA Actions 

FINRA’s 529 Plan Share Class Initiative (“Initiative”):  FINRA issued Regulatory Notice 19-04 to encourage FINRA members to assess their supervisory programs related to share class recommendations of 529 Plans, identify and correct potential deficiencies, and promptly reimburse customers that may have been harmed as a result of any supervisory deficiencies.  The carrot being offered to self-reporting firms is that FINRA’s Department of Enforcement “will recommend that FINRA accept favorable settlement terms for firms that self-report these potential violations and provide FINRA with a detailed remediation plan.”  This means FINRA’s Enforcement Division will limit sanctions against firms that self-report to restitution but no fines.

To be eligible for relief provided by the Initiative, firms must: (1) voluntarily self-report to FINRA any potential violations regarding the supervision and suitability of share class recommendations to customers of 529 Savings Plans; and (2) confirm eligibility by submitting certain required information for the disclosure period, January 1, 2013 through June 30, 2018.

Important Dates

  • Friday, March 29, 2019 – Firms that want to self-report must submit written notification (self-report) to FINRA via email to by 12 a.m. on April 1 (we advise sending it at the Friday before) or via mail to “529 Plan Initiative, FINRA, Department of Enforcement, Brookfield Place, 20 Liberty Street, New York, New York 10281.”
  • Wednesday, May 1, 2019 – Firms can request an extension to submit the required information via email to
  • Friday, May 3, 2019 – Firms that have not received an extension must confirm eligibility by submitting to FINRA and provide the information outlined on page 4 of Regulatory Notice 19-04.

To make the self-reporting decision, conduct a preliminary assessment of your supervisory procedures (refer to MSRB Rules G-17, G-19, and G-27).  Regulatory Notice 19-04 conveniently includes some guidance the type of supervision expected by FINRA and the MSRB concerning share class recommendations of 529 Plans.  These sources include the 2017 Report on FINRA Examination Findings; FINRA’s 2016 Regulatory and Examination Priorities Letter; and MSRB Notice 2006-07.  FINRA also made a video discussing the Initiative.    We have gone through these documents and assembled a checklist of factors to consider when assessing deficiencies in your firm’s supervisory system.

Disclosure Events and Form BD Updates  

Based on the results of the formal assessment, firms may need to file a 4530(b) Disclosure Event through FINRA’s firm gateway.  Also, firms that enter into a settlement agreement with FINRA may need to update Item 11.E(2) of Form BD.

Should You Report?

Given the numerous potential deficiencies identified by FINRA and the MSRB in various communications, it is highly unlikely that any firm has a perfect supervisory program concerning share-class recommendations of 529 plans.  FINRA has made it clear that it intends to focus on firms’ supervision of share-class recommendations during the next examination cycle.  If FINRA identifies supervisory failures at firms that did not self-report, these firms should expect fines and more punitive sanctions than those described in the Initiative.  Fines will be levied in addition to restitution owed to customers, as calculated by FINRA.  The time and financial burden on a firm to respond to a FINRA-initiated investigation will be far greater than the resources required to conduct a self-assessment and pay restitution to customers that may have been harmed.  Please note that 4530 Disclosure Events are not public disclosures.  Only Form BD disclosures are made available to the public.   It is expected that many firms will take advantage of the Initiative.  Smaller firms with limited resources whose 529 transaction data was not aggregated into sophisticated surveillance systems are the most likely candidates for self-reporting.  Form BD disclosures will most likely be common among the small firm peer group.  Contributed by Rochelle A. Truzzi, Senior Compliance Consultant

Don’t Forget to Deliver the Options Disclosure Document!  Broker-dealers are responsible for delivering a copy of the “Characteristics & Risks of Standardized Options,” a/k/a the options disclosure document (“ODD”), which contains general disclosures on the risks of trading options.  Rule 9b-1 and FINRA Rule 2360 (b)(11) require broker-dealers to deliver the ODD and any supplements to options customers before approving an options account and when any amendments are made.   Introducing broker-dealers can rely on their carrying firms to deliver the disclosure unless otherwise agreed.

The ODD Supplement was amended in October of 2018 and required distribution to all existing options customers no later than when a customer receives confirmation of an options transaction. Distribution may be conducted by way of a mass mailing, individually at the time of confirmation delivery, electronically or via hyperlink to customers who have consented to electronic delivery through the use of a hyperlink.

FINRA Reminder Regarding U.S. Treasury Security Auction Awards: DON’T DO IT:  Firms should NOT report auction transactions in U.S. Treasury securities to TRACE as the Treasury Department already maintains these auction awards and the auction data is readily accessible to regulators.   This includes both house awards and indirect bidder awards.  Refer to Section 3.5 of FINRA’s TRACE FAQ.  Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

Photo Credits: Photo by Tim Gouw on Unsplash

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