The Financial Industry Regulatory Authority has ordered Merrill Lynch to return almost $1.5 million to customers, contending that the firm's supervisory lapses caused its customers to pay avoidable fees on some 2,000 accounts.
Specifically, the regulator said Merrill’s reps had recommended that customers purchase products in brokerage accounts instead of advisory accounts, when the latter were eligible for fee waivers.
Finra said Monday that because of those lapses Merrill had to pay restitution of $1,486,380, as well as interest, to 1,361 different customers.
“Merrill Lynch offers customers a 12-month waiver of otherwise-applicable advisory fees on certain new-issue products, if, and only if, the products are purchased initially in an advisory account,” Finra said in its disciplinary letter. “Notwithstanding this benefit, from January 2018 to June 2022, in certain instances [the firm’s] registered representatives recommended that customers purchase such products in a brokerage account and then promptly recommended the transfer of those same products to an advisory account. These brokerage recommendations caused customers to incur unnecessary expenses—in particular, in the form of advisory fees that would have been avoided if the assets were purchased initially in advisory accounts.”
Finra said Merrill had failed to set up a supervisory system to ensure that its reps could determine recommendations were suitable or in the customer’s best interest. In doing so, the firm had run afoul of Finra’s Rule 2111 on suitability before June 2020 and afterward had failed to consider the clients’ best interest under the Securities and Exchange Commission’s Reg BI.
Finra’s Rule 2111 says reps must have “a reasonable basis to believe that a recommendation of a transaction or investment strategy involving a security of securities to any customer is suitable for the customer.”
This is the second time in two months that Finra has penalized Merrill Lynch, Pierce, Fenner & Smith, the investment management and wealth management division of Bank of America. In May, the regulatory agency fined Merrill $825,000 for failing to supervise the timeliness of order executions and record-keeping lapses.
Merrill Lynch had no comment on Monday's disciplinary letter. Finra noted Merrill’s cooperation in resolving the suitability matter, however, including the firm’s internal review in identifying affected customers and calculating the amount to reimbursed.