Merrill Lynch has been ordered to pay $7.2 million in restitution to customers who were overcharged for mutual fund transactions, the Financial Industry Regulatory Authority announced Thursday.
Without admitting to or denying the charges, Merrill Lynch agreed to pay the restitution and interest and has already made those payments, Finra said in a statement. Merrill Lynch enhanced its procedures in 2017 to ensure clients always receive the appropriate fee waivers and rebates related to mutual fund purchases and fully reimbursed affected clients a year ago, the firm said.
Between April 2011 and April 2017, Merrill Lynch customers were charged unnecessary sales charges and paid excess fees in connection with mutual fund transactions, Finra said. The firm did not use supervisory systems and procedures reasonably designed to ensure that these customers, who collectively held more than 13,000 Merrill Lynch accounts, received available sales charge waivers and fee rebates, the authority said.
“The firm's supervisory failures led to customers not receiving millions of dollars in sales charge and fee waivers on mutual fund purchases," said Jessica Hopper, executive vice president and head of Finra's Department of Enforcement. "We are pleased that Merrill has reimbursed the customers affected by its failure to provide these waivers. Ensuring that harmed customers receive restitution is our highest priority, and we will take a firm's determination to proactively provide restitution into account when assessing sanctions."
Mutual fund issuers generally offer customers a right of reinstatement, which allows investors to purchase shares of a fund after previously selling shares of that fund or another fund in the same fund family, without incurring a front-end sales charge, or to recoup all or part of a contingent deferred sales charge, Finra said.
Merrill Lynch relied on its registered representatives to manually identify and apply such waivers and rebates, an unreasonably designed system given the number of customers involved, the complexity of determining which customers were due sales charge waivers or fee rebates, and difficulty in calculating the amount of the waiver and rebate, Finra added.
The firm also did not reasonably monitor for missed reinstatements. Firm alerts were designed to capture only recently executed mutual fund transactions while, in fact, fee waivers were available in connection with some fund purchases for up to a year after initial sales, the authority said. Because of its faulty procedures, Merrill Lynch failed to detect that its advisors did not provide more than 13,000 accounts with sales charge waivers and fee rebates totaling more than $7.2 million, Finra said.
In determining the appropriate monetary sanction, Finra recognized Merrill Lynch's “extraordinary cooperation, which included engaging an outside consulting firm to identify potentially disadvantaged customers and calculate total remediation; promptly paying restitution to affected customers; promptly remediating related supervisory deficiencies; and providing substantial assistance to Finra in its investigation,” the regulator said.