FINRA Orders Merrill Lynch, Pierce, Fenner & Smith, Inc. to Pay $15.2 Million in Restitution
WASHINGTON— FINRA announced today that it has ordered Merrill Lynch, Pierce, Fenner & Smith, Inc. to pay more than $15.2 million in restitution and interest to thousands of customers who purchased Class C mutual fund shares when Class A shares were available at substantially lower costs.
Mutual fund issuers offer different classes of mutual fund shares, including Class A and Class C shares. As a general matter, Class A shares are subject to a front-end sales charge; Class C shares typically do not carry a front-end sales charge but have ongoing fees and expenses that are higher than those of Class A shares. Many mutual fund issuers allow customers to purchase Class A shares without a front-end sales charge if the purchase exceeds certain thresholds. If a customer qualifies to purchase Class A shares without a front-end sales charge, there would be no reason for the customer to purchase Class C shares with higher annual expenses.
Merrill Lynch maintained an automated system designed to restrict a customer’s purchase of Class C shares when lower cost Class A shares were available. The system, however, often failed to correctly identify and implement applicable purchase limits on Class C shares. As a result, thousands of Merrill Lynch customers purchased Class C shares, incurring fees and charges, when Class A shares were available at a substantially lower cost.
For example, in November 2019, the firm’s system failed to flag a customer’s purchase of Class C shares with annualized expenses of approximately 1.76 percent when the customer could have purchased Class A shares with lower annualized expenses of approximately 0.96 percent without paying a sales charge.
“FINRA member firms must have supervisory systems reasonably designed to ensure that customers are aware of, and receive, available discounts when purchasing mutual funds, and are not charged unnecessary fees and expenses,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement. “We want to remind and encourage firms to proactively detect, fix, and remediate these types of supervisory issues to realize the benefits of extraordinary cooperation when warranted.”
In addition to providing restitution to harmed customers, Merrill Lynch has agreed to convert certain customers’ existing Class C holdings to Class A shares, where appropriate. FINRA did not impose a fine due to the firm’s extraordinary cooperation and substantial assistance with the investigation. Merrill Lynch voluntarily and proactively conducted an internal review, engaged an outside consultant to identify affected customers and calculate remediation, and established a remediation plan to repay customers and convert shares, where applicable.
FINRA provided guidance to broker-dealers on common sales charge discounts and waivers for mutual funds in Regulatory Notice 21-07. In 2015 and 2016, FINRA identified sales charge discounts and waivers as priorities in the Regulatory and Examination Priorities Letter.
In settling this matter, Merrill Lynch accepted and consented to the entry of FINRA’s findings without admitting or denying them.
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.