SEC charges firm for Reg BI failures in 529 savings plans

The Securities and Exchange Commission has charged Thrivent Investment Management for violating the obligations in Regulation Best Interest when brokers for the firm recommended Class A mutual fund shares instead of Class C mutual fund shares in Illinois and Nebraska 529 Savings Plans.

Without admitting or denying the findings, the firm has agreed to a censure, a cease and desist from future violations and a $25,000 civil penalty.

"Thrivent failed to consider the current and accurate costs of the mutual fund shares it recommended for investment through the Illinois 529 Savings Plan and Nebraska 529 Savings Plan between June 30, 2020 and July 2022," the SEC said.

The Class A shares of the Illinois 529 Savings Plan and Nebraska 529 Savings Plan came with upfront sales charges in addition to annual fees, whereas the Class C shares did not come with upfront or any other sales charges but charged higher annual fees than the Class A for the first ten years, after which they were also converted to Class A shares.

According to the Commission, Thrivent and its brokers used a 529 College Savings Plan share class calculator to help them identify and recommend the appropriate share class to its retail investors.

"However, during the relevant period, Thrivent did not review or update the information in its 529 College Savings Plan share class calculator related to the reduction in expense ratios for Class C shares in the Illinois 529 Savings Plan and the Nebraska 529 Savings Plan," the SEC said. "As a result, the calculator continued to indicate that Class A mutual fund shares were less expensive than Class C mutual fund shares for certain of Thrivent's retail customers."

The error was discovered in 2022 when during an examination, Thrivent's Suitability Department determined that its 529 College Savings share class calculator incorrectly added upfront sales charges to Class C shares, artificially inflating the costs of the Class C shares.

"In correcting this error, Thrivent subsequently discovered that its 529 College Savings Plan share class calculator had not been timely reviewed and updated to account for the reduction in annual expense ratios between Class C shares and Class A shares that had occurred in 2020," the SEC said.

In its correction, the firm also paid out $220,000 to 846 retail customers, accounting for upfront sales charges plus interest.

The SEC's examination priorities for 2024 indicated Regulation Best Interest would be on its radar, noting that examinations will center around whether broker-dealers have established, maintained and enforced written policies and procedures designed for compliance with Reg BI, whether those policies are reasonably designed with respect to costs, risks and rewards and center around conflicts of interest, account allocation practices and account selection practices. So far there haven't been any that have touched the municipal bond industry.

In April, the SEC released a staff bulletin in the form of questions and answers to help reiterate the standards of conduct for broker-dealers. According to law firm Skadden Arps, the bulletin "seems to go farther than Reg BI in three ways" including in potentially high risk products, processes for alternatives outside of the standard written supervisory procedures, and a protocol for those that recommend complex or risky products.

"Reg BI sometimes turns on whether a broker-dealer has acted reasonably, or has reasonably designed policies and procedures, and the SEC may well consider compliance with the Bulletin when assessing whether a broker-dealer's conduct, in the aggregate, was reasonable," Skadden said. "Similarly, the Bulletin may well become a consideration during FINRA or SEC exams."