Merrill ordered to pay clients $15.2 million for improper fund sales
The Financial Industry Regulatory Authority ordered Merrill Lynch to pay $15.2 million to thousands of customers it placed in expensive mutual fund stocks when “significantly lower cost” stocks became available.
Merrill Lynch’s multi-year breach came as customers were routed to C shares, which have ongoing fees and expenses, instead of Class A shares, which typically have a single upfront sales commission, Finra said.
Additionally, “many mutual fund issuers allow clients to purchase Class A shares without a sales charge if the purchase exceeds certain thresholds. If a client qualifies to purchase Class A shares with no upfront sales charge, there would be no reason for the client to purchase Class C shares with higher annual expenses,” the regulator said.
Due to failures in Merrill Lynch’s monitoring and automated system, the broker failed to flag and correct share class violations, costing clients millions, Finra said.
Merrill Lynch settled the charges without admitting or denying guilt, Finra said. The firm did not immediately respond to a request for comment.
According to Finra’s charges, 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.
But the system “often failed to correctly identify and implement purchase limits applicable to Class C shares. As a result, thousands of Merrill Lynch customers purchased Class C shares, resulting in fees and charges. , whereas Class A shares were available at a significantly lower cost,” Finra said.
In November 2019, for example, the company’s system failed to flag the purchase of Class C shares by a client who had an annualized spend of approximately 1.76%, when the client would have had to be routed to purchase Class A shares, was charged a lower annualized expense. by 0.96% and had their selling fees waived, according to Finra.
“Finra member firms must have reasonably designed monitoring systems in place to ensure that clients are aware of and receive the rebates available when purchasing mutual funds, and are not charged unnecessary fees and expenses” , Jessica Hopper, Executive Vice President and Head of Department of Finra. Application, said in a statement.
“We want to remind and encourage companies to proactively detect, resolve and address these types of surveillance issues to realize the benefits of extraordinary cooperation when warranted,” she added.