FINRA Fines Merrill Lynch, Pierce, Fenner & Smith $15.2 Million

FINRA today announced that Merrill Lynch, Pierce, Fenner & Smith, Inc. has been ordered to pay $15.2 million in restitution to thousands of customers who purchased class C mutual fund shares, even though Class A shares were significantly cheaper.

Mutual fund issuers offer a variety of classes of mutual funds shares, including Class A shares and Class C shares. In general, Class A shares carry a front-end sales charge. Class C shares don’t usually have a front-end sales charge but may incur ongoing fees or expenses that are greater than Class A shares. If the purchase exceeds certain thresholds, many mutual fund issuers will allow customers to buy Class A shares without any front-end sales charges. Customers who are eligible to buy Class A shares will not be charged a sales tax.

Merrill Lynch had an automated system that would restrict customers from purchasing Class C shares when Class A shares were cheaper. However, the system often failed to identify and apply appropriate purchase limits for Class C shares. Merrill Lynch customers bought thousands of Class C shares and were charged fees and charges when they could have purchased Class A shares at a significantly lower price.

The firm’s system did not flag in November 2019 a customer’s purchase of Class C shares with an annualized expense of 1.76 percent. However, the customer could have bought Class A shares with lower annualized costs of 0.96 percent and no sales tax.

Jessica Hopper, Executive Vice-President and Head of FINRA’s Department of Enforcement, stated that member firms must have supervisory mechanisms reasonably designed to ensure customers are informed about and receive discounts when they purchase mutual funds and that they are not charged any fees or expenses. We want to remind and encourage companies to detect, fix, or remediate these types of supervisory issues to reap the rewards of extraordinary cooperation.

Merrill Lynch will convert Class C shares of certain customers to Class A shares if necessary, in addition to paying restitution for customers who were harmed. FINRA did NOT impose a penalty for the firm’s exceptional cooperation and substantial assistance during the investigation. Merrill Lynch conducted an internal review voluntarily and proactively, hired an outside consultant to identify and calculate remediation, and created a plan to repay customers, convert shares, and other relevant matters.

In Regulatory Notice 21-7, FINRA provided guidance for broker-dealers regarding common sales charges discounts and waivers of mutual funds. In 2015 and 2016,, FINRA identified sales charges discounts and waivers in the Regulatory and Examination Priorities Letter.

Merrill Lynch agreed to this settlement without admitting or denying the findings of FINRA.

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