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Merrill Lynch: Ordered by FINRA to Pay $15.2 Million in Restitution

Thousands of consumers who bought Class C mutual fund shares while Class A shares were readily available at far cheaper prices will receive more than $15.2 million in compensation and interest from Merrill Lynch, Pierce, Fenner & Smith, Inc., according to a recent announcement from FINRA.

There are several classifications of mutual fund shares available from mutual fund issuers, including Class A and Class C shares. In general, Class A shares are liable to a front-end sales charge; Class C shares, on the other hand, normally do not have a front-end sales charge but do have continuing fees and expenditures that are greater than those of Class A shares.

 If the transaction exceeds specific criteria, several mutual fund issuers let consumers buy Class A shares without paying a front-end sales fee. There would be no justification for a client to buy Class C shares with greater yearly expenditures if they are eligible to buy Class A shares without a front-end sales tax.

In order to prevent customers from purchasing Class C shares when Class A shares with cheaper prices were available, Merrill Lynch established an automated system. However, the system frequently made mistakes when determining and enforcing relevant purchase limitations on Class C shares. As a result, hundreds of Merrill Lynch clients bought Class C shares, paying fees and charges, even though Class A shares were readily available at a far cheaper price.

For instance, in November 2019, the company’s system overlooked a customer’s purchase of Class C shares with annualized expenses of roughly 1.76 percent when the customer could have chosen to buy Class A shares instead, which have annualized expenses of only 0.96 percent and don’t require a sales fee.

As stated by Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, “FINRA member businesses must have supervisory systems appropriately created to make sure clients are cognizant of and receive, offered reductions when acquiring mutual funds, and are not charged unwarranted costs and expenses. “We want to remind to encourage firms to aggressively detect, fix, and remediate these kinds of regulatory issues to realize the advantages of exceptional cooperation when warranted.”

Merrill Lynch has agreed to convert certain customers’ current Class C holdings to Class A shares, where appropriate, in addition to paying damages to hurt consumers. Due to the firm’s exceptional cooperation and significant help with the inquiry, FINRA decided not to issue a punishment. 

In order to identify affected consumers and determine remediation, Merrill Lynch hired an independent consultant. The company also created a remediation strategy that, where necessary, included the repayment of affected customers and the exchange of shares.

In Regulatory Notice 21-07, the Financial Industry Regulatory Authority (FINRA) issued advice to broker-dealers on typical sales fee reductions and exemptions for mutual funds. FINRA designated sales fee reductions and exemptions as a priority in the Regulatory and Examination Priority Letter in 2015 and 2016.

Without acknowledging or disputing the FINRA’s conclusions, Merrill Lynch agreed to have them entered as part of the settlement of this case.

About FINRA

Safety for investors and market integrity are the two main goals of FINRA, a nonprofit organization. Brokerage businesses conducting business with the American public are regulated by it, making them a crucial component of the securities sector. 

FINRA, which is governed by the SEC, develops regulations, checks compliance with FINRA rules and federal securities laws, enacts sanctions when violations are found, registers broker-dealer employees, provides them with education and training, and educates the investing public. 

As well as offering transaction reporting and other industry utilities, FINRA also offers monitoring and other regulatory services for the equity and options markets. Furthermore, FINRA manages a forum for investors, brokerage companies, and their registered staff to resolve disputes.

This article was originally posted on – FINRA (FINRA Orders Merrill Lynch, Pierce, Fenner & Smith, Inc. to Pay $15.2 Million in Restitution | FINRA.org)