FINRA orders Merrill Lynch to pay $15.2m in restitution over mutual funds

Rick Steves

FINRA has ordered Merrill Lynch 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.

As the regulator explained, mutual fund issuers offer different classes of mutual fund shares, including Class A, which are subject to a front-end sales charge, and Class C shares, which typically do not carry a front-end sales charge but have ongoing fees and expenses that are higher than those of Class A shares.

Customers usually can purchase Class A shares without a front-end sales charge if the purchase exceeds certain thresholds and 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, Pierce, Fenner & Smith, Inc. 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. This led FINRA to act.

FINRA applauds Merrill Lynch extraordinary cooperation

Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, said: “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. 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.”

Merrill Lynch accepted and consented to the entry of FINRA’s findings without admitting or denying them, agreed to provide restitution to harmed costumers and agreed to convert certain customers’ existing Class C holdings to Class A shares, where appropriate.

The mutual fund issuer also 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 did not impose a fine due to the firm’s extraordinary cooperation and substantial assistance with the investigation.

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