More On Legal & Compliancefrom The Advisor's Professional Library
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
The Financial Industry Regulatory Authority said Thursday that it fined Merrill Lynch (BAC) $2.8 million for supervisory failures that resulted in clients being overcharged $32 million in unwarranted fees from 2003 to 2011. As a result of this issue and for its failure to provide certain required trade notices, FINRA says, Merrill is paying $32 million in remediation, plus interest, to the affected clients.
"Investors must be able to trust that the fees charged by their securities firm are, in fact, correct," said Brad Bennett, executive vice president and chief of enforcement for FINRA, in a press release. "When this is not the case, investor confidence is threatened."
According to the settlement document, Merrill Lynch identified these problems of its own volition and “took remedial measures to correct its systems and procedures.” It neither admitted nor denied the charges but consented to the entry of FINRA's findings.
“Following Bank of America’s acquisition of Merrill Lynch, we identified operational issues that affected certain investment advisory accounts,” said a Merrill spokesperson in a statement. “These issues primarily were the result of improper coding of accounts. We have improved our systems to address these issues and we have reimbursed affected clients.”
FINRA found that from April 2003 to December 2011, Merrill Lynch failed to have an adequate supervisory system to ensure that customers in certain investment advisory programs were billed in accordance with contract and disclosure documents. This led to overcharges affecting nearly 95,000 customer-account fees of more than $32 million.
Merrill Lynch has since returned the unwarranted fees, with interest, to the affected customers.
“The fine is a small amount, but the restitution of $32 million is a significant amount of money,” said Chip Roame (left) of the consulting group Tiburon Strategic Advisors, in an interview with AdvisorOne. “And 95,000 wronged customers is a lot. This certainly makes those clients question the firm's compliance if not its ethics.”
FINRA also says that Merrill failed to provide timely trade confirmations to customers in certain advisory programs due to computer programming errors. As a result, from July 2006 to November 2010, Merrill Lynch failed to send customers trade confirmations for more than 10.6 million trades in over 230,000 customer accounts.
In addition, Merrill Lynch did not properly identify whether it acted as an agent or principal on trade confirmations and account statements relating to at least 7.5 million mutual fund purchase transactions. At various times, Merrill Lynch also failed to deliver certain proxy and voting materials, margin risk disclosure statements and business continuity plans.
“Merrill Lynch is a big firm, with millions of rules to apply,” Roame said. “Will it make errors? Yes. Will those be sinister, intentional errors? That’s doubtful. I assume this was an error. It’s difficult to comply with so many regulations. This is a highly regulated industry for good reason, and I see no pattern of intentional sinister actions.”