FINRA Sanctions Merrill Lynch For Failure To Supervise

Merrill Lynch a securities broker dealer headquartered in New York New York has been censured by Financial Industry Regulatory Authority (FINRA) founded on findings that Merrill Lynch overcharged customers on mutual fund transactions. Letter of Acceptance Waiver and Consent No. 2017053494401 (June 4, 2020).

According to the AWC, between April of 2011 and April of 2017, Merrill Lynch neglected to create and implement a supervision system and written supervisory procedures with a view towards ensuring that its customers obtained sales charges discounts or contingent deferred sales charge (CDSC) rebates that customers were eligible for in connection with their mutual fund transactions. FINRA noted that mutual fund issuers through Merrill Lynch’s platform enabled investors to avoid sales charges when they re-purchased shares of a fund. Issuers also offered investors a way of recouping contingent deferred sales charges if a reinvestment took place within a timely manner.

The AWC stated that Merrill Lynch tasked its stockbrokers with manually identifying the sales charge waivers and the rebates offered to customers via rights of reinstatement. But the securities broker dealer’s supervisors were not obligated to check if customers received those rebates. FINRA stated that Merrill Lynch’s dependence on its stockbrokers was inappropriate because of the complexities of determining who would be granted sales charge waivers and CDSC rebates or the manner in which they were to be calculated.

The AWC stated that Merrill Lynch failed to check for missed reinstatements. Its alert system did not detect when there were missed reinstatements because of the alert system only reviewing investments that took place within five days of a prior sale. Many mutual funder issuers offered sales charges waivers and CDSC rebates for reinvestments that took place within one-to-four months.

The AWC stated that 13,328 accounts were affected by Merrill Lynch’s failed procedures. The securities broker dealer failed to provide those accounts with sales charges waivers and CDSC rebates which resulted in $6,000,000.00 in excess sales charges paid by customers. FINRA determined Merrill Lynch’s failure to supervise in this respect to be violative of FINRA Rules 2010 and 3110 as well as National Association of Securities Dealers (NASD) Rule 3010.

This is not the first time that Merrill Lynch has been sanctioned for overcharging customers. The securities broker dealer was previously censured and fined $8,000,000.00 by FINRA supported by findings that Merrill Lynch failed to supervise mutual fund transactions to protect unsuitable transactions and unreasonable sales charges. Letter of Acceptance Waiver and Consent No. 2011029999301. The regulator noted that 30,000 accounts were subject to sales charges on Class A mutual fund share purchases when those accounts were eligible for purchases without sales charges.