FINRA Fines Merrill Lynch $5 Million

Noam Stiekema

FINRA Fines Merrill Lynch $5 Million for Failing to Disclose Material Facts in Sales of Volatility-Linked Structured Notes to Retail Customers. Read more.


WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $5 million for negligent disclosure failures in connection with the sale of five-year senior debt notes to retail customers. In particular, Merrill Lynch failed to adequately disclose certain costs, making it appear that the fixed costs were lower than they actually were.

The notes, known as strategic return notes, were linked to Merrill Lynch’s proprietary volatility index. The firm structured the index to track volatility in the equities markets by rebalancing, or rolling, S&P 500 Index options contracts through a series of simulated trades. During the relevant period, the firm sold approximately $168 million worth of the notes to its retail customers, promoting them as a hedge against potential downturns in the equities markets. Included in the costs associated with the notes was the “execution factor,” a feature of the Index intended to replicate transaction costs incurred in the simulated buying and selling of S&P 500 Index options. These transaction costs accrued on a daily basis and totaled 1.5 percent per quarter. In buying the notes, a reasonable retail customer would have considered it important that the execution factor imposed these costs.

FINRA found that Merrill Lynch did not adequately disclose the execution factor in the offering documents or sales material. Instead, the firm emphasized that customers would be subject to a 2 percent sales commission and a 0.75 percent annual fee in connection with the notes. Merrill Lynch’s disclosures therefore made it appear as if the notes had relatively low fixed costs. As a result, the firm’s disclosures in the offering documents pertaining to the fixed costs were materially misleading to customers.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Firms must take extra care when marketing unusually complex products to retail customers. Given the importance of costs and expenses to investment performance, firms must ensure that all costs are disclosed clearly and plainly so that retail customers can fully understand and assess the investment.”

In settling this matter, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2015, members of the public used this service to conduct 71 million reviews of broker or firm records. Investors can access BrokerCheck at or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database. Investors can also call FINRA’s Securities Helpline for Seniors at (844) 57-HELPS for assistance or to raise concerns about issues they have with their brokerage accounts and investments.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating 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 the largest dispute resolution forum for investors and firms. For more information, please visit

For Release: Thursday, June 23, 2016

Contact(s): Michelle Ong (202) 728-8464, Nancy Condon (202) 728-8379

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