The Financial Industry Regulatory Authority has ordered Merrill Lynch to pay $15.2 million to thousands of customers it placed into pricey mutual fund shares when “substantially lower cost” shares were available.
Merrill Lynch’s multiple-year offense came from customers being routed into C shares, which have ongoing fees and expenses, instead of to Class A shares, which usually have a single, upfront sales charge, Finra said.
In addition, “many mutual fund issuers allow customers to purchase Class A shares without a front-end sales charge if the purchase exceeds certain thresholds. 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,” the regulator said.
As a result of Merrill Lynch’s supervisory and automated system failures, the broker-dealer failed to flag and correct the share class violations, which cost customers 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 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,” Finra said.
In November 2019, for example, the firm’s system failed to red flag a customer’s purchase of Class C shares which had annualized expenses of approximately 1.76%, when the customer should have been routed into a Class A share purchase, been charged a lower annualized expense of 0.96% and had their sales charge waived, according to Finra.
"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,” Jessica Hopper, executive vice president and head of Finra's Department of Enforcement, said in a statement.
"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,” she added.