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FINRA Wallops Merrill: $8M Fine, $24M in Restitution for Overbilling Charities, Small Businesses

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The Financial Industry Regulatory Authority announced Monday that it has fined Merrill Lynch $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts, and has ordered Merrill Lynch to pay $24.4 million in restitution to affected customers, which is in addition to the $64.8 million the firm has already repaid to harmed investors.

Most of the mutual funds available on Merrill Lynch’s retail platform offered such waivers to retirement plan accounts and disclosed those waivers in their prospectuses.

However, FINRA says that at various times since at least January 2006, Merrill Lynch did not waive the sales charges for affected customers when it offered Class A shares. As a result, approximately 41,000 small-business retirement plans, and approximately 6,800 charities and 403(b) retirement plan accounts available to ministers and employees of public schools, either paid sales charges when purchasing Class A shares, or purchased other share classes that unnecessarily subjected them to higher ongoing fees and expenses.

As FINRA explains, typically, Class A shares have lower fees than Class B and C shares, but charge customers an initial sales charge. Many mutual funds waive their upfront sales charges for retirement accounts and some waive these charges for charities.

Merrill Lynch learned in 2006 that its small-business retirement plan customers were overpaying, but continued to sell them more costly shares and failed to report the issue to FINRA for more than five years, FINRA says.

“Merrill Lynch failed to offer available waivers to customers, including small business retirement accounts and charitable organizations,” Brad Bennett, FINRA’s executive VP and chief of enforcement, said in a statement. “FINRA’s commitment to investor protection is highlighted by the significant restitution component of this settlement, which reinforces that investors must be able to trust that their brokerage firm will offer the lowest-cost share classes available to them. When firms fail to do so, we will take appropriate action.”

In concluding the settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

In a statement issued the same day, Merrill said that “following Bank of America’s acquisition of Merrill Lynch, we concluded that certain Merrill Lynch clients did not receive fee waivers for which they were eligible when purchasing some mutual funds.”

The discrepancies, Merrill said, “were principally in certain types of retirement accounts, not individual brokerage accounts or IRAs.”

Merrill stated that the firm “notified FINRA about our findings and voluntarily began making refunds to affected clients.”

FINRA stated that Merrill Lynch’s written supervisory procedures provided little information or guidance on mutual fund sales charge waivers. “Even after the firm learned that it was not providing sales charge waivers to eligible accounts, Merrill Lynch relied on its financial advisors to waive the charges, but failed to adequately supervise the sale of these products or properly train or notify its financial advisors about lower-cost alternatives,” FINRA states.

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