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Regulation and Compliance > Federal Regulation > FINRA

Merrill to Pay Clients $15M for Share Class Violations

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What You Need to Know

  • Thousands of clients bought Class C shares when Class A shares were available at substantially lower costs.
  • Merrill system often failed to correctly identify and implement applicable purchase limits on Class C shares.
  • Merrill Lynch also has agreed to convert certain clients’ existing Class C holdings to Class A shares.

The Financial Industry Regulatory Authority ordered Merrill Lynch to pay more than $15.2 million in restitution and interest on Thursday to thousands of clients who purchased Class C mutual fund shares when Class A shares were available at substantially lower costs from early 2015 to early 2021.

As a general matter, Class A shares are subject to a front-end sales charge; Class C shares typically do not carry a front-end sales charge but have ongoing fees and expenses that are higher than those of Class A shares.

Merrill Lynch maintained an automated system designed to restrict a client’s purchase of Class C shares when lower cost Class A shares were available, according to FINRA.

“The system, however, often failed to correctly identify and implement applicable purchase limits on Class C shares,” FINRA said. “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.”

For example, in November 2019, the firm’s system failed to flag a customer’s purchase of Class C shares with annualized expenses of about 1.76% when the client could have purchased Class A shares with lower annualized expenses of approximately 0.96% without paying a sales charge, according to the regulatory group.

Jessica Hopper, head of FINRA Enforcement, said in a statement that “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.”

FINRA, Hopper continued, wants “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.”

In addition to providing restitution to harmed customers, Merrill Lynch has agreed to convert certain customers’ existing Class C holdings to Class A shares, where appropriate, FINRA said.

FINRA said that it did not impose a fine “due to the firm’s extraordinary cooperation and substantial assistance with the investigation.”

In a Thursday statement shared with ThinkAdvisor, Merrill said that “We proactively detected this issue, reported it to FINRA and developed a client reimbursement plan. We implemented enhancements to address the issue and appreciate FINRA’s acknowledgement of our extraordinary cooperation.”

Merrill Lynch voluntarily and proactively conducted an internal review, engaged an outside consultant to identify affected customers and calculate remediation, and established a remediation plan to repay customers and convert shares, where applicable, FINRA explained.

In settling the matter, Merrill Lynch accepted and consented to the entry of FINRA’s findings without admitting or denying them.


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