Merrill Lynch Sanctioned by FINRA For Lack of Supervision

Merrill Lynch, Pierce, Fenner & Smith Incorporated (CRD No. 7691) is a long-term member of FINRA for more than 80 years, and recently resolved a FINRA investigation involving its failure to supervise mutual fund transactions between 2015 and 2021. The FINRA sanction imposes a censure and directs Merrill Lynch to pay $13.4M in restitution plus interest to those investors its FINRA rule violations affected. The company must also include a letter that informs the investor of why they’re receiving this money–specifically that it is because of allegations investigated by FINRA and the resulting settlement.

Company Profile

According to FINRA, Merrill Lynch, based in New York, has roughly 31,000 representatives providing full-service brokerage capacities. The company provides sales and trading services, research, and underwriting services. In January 2009, Merrill Lynch became an indirect, wholly-owned subsidiary of Bank of America Corporation.

Details of Current Allegations

According to FINRA, Merrill Lynch didn’t have a reliable supervisory system in place to sell mutual fund Class C shares to its customers. The costs of buying mutual funds vary between Class A shares and Class C shares. Among other differences, buying Class A shares includes front-end expenses while Class C shares don’t; however, Class C shares generally have higher carrying costs such as fees and contingent deferred sales charges. All of these differences are outlined in the prospectus.

Member firms often partially or fully reduce the sales charges for Class A shares if the purchase is large enough. At the same time, member firms may restrict the number of Class C shares a customer may purchase in line with the suitability of the investment versus factors such as the needs and experience of the investor.

In this case, FINRA alleges that Merrill Lynch didn’t effectively ensure the suitability of Class C shares for its customers. They paid millions of dollars in unnecessary fees and other charges when they could have bought Class A shares instead, and more affordably.

While Merrill Lynch faced consequences for violations of FINRA Rules 3110 and 2010, the regulatory agency recognized the company’s commitment to cooperation in resolving the allegations. Because of that, no fine was imposed upon Merrill Lynch as would typically be expected in a case like this. Merrill Lynch was only censured and ordered to pay restitution of $15.2M.

Previous Complaints About Unsuitability and Lack of Supervisory Procedures Against Merrill Lynch

In 2014, Merrill Lynch was sanctioned by FINRA with an $8M fine and paid $24.2 in restitution. It is alleged by FINRA that the company failed to offer suitable investments and properly supervise its financial advisors from 2006 to 2011. Customers were charged a sales charge even though they purchased Class A shares that did not require an up-front sales charge.

In 2020, Merrill Lynch was sanctioned by FINRA with censure and $7.2M in restitution in response to allegations of supervisory failures, including a lack of written procedures intended to determine the suitability of various share types for customers. More than 13,000 accounts had been affected.

We Help Investors Recover Investment Losses

Financial advisors have a legal and regulatory obligation to recommend only suitable investments that are appropriate for their clients’ needs and objectives. Their employing brokerage firm has a legal and regulatory obligation to supervise the Financial Advisors’ sales practices and dealings with clients. To the extent any of these duties are breached, the customer may be entitled to a recovery of his or her investment losses.

Reasonable basis suitability requires that a recommended investment or investment strategy be suitable or appropriate for at least some investors. Reasonable basis suitability requires an advisor to conduct adequate due diligence so that he or she can determine the risks and rewards of the investment or investment strategy.

Quantitative suitability requires a brokerage firm or financial advisor with actual or de facto control over a customer’s account to have a reasonable basis for believing that a series of recommended transactions – even if suitable when viewed in isolation – is not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile. No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.

Customer-specific suitability requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile. Among the criteria that a financial advisor must evaluate to satisfy his or her customer-specific suitability obligations include the investor’s age, tax status, time horizon, liquidity needs, and risk tolerance; a client’s other investments, financial situation and needs, investment objectives, and any other information disclosed by the customer should also be considered.

The Wolper Law Firm, P.A. represents investors nationwide in securities litigation and arbitration on a contingency fee basis.  Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at (800) 931-8452 or by email at mwolper@wolperlawfirm.com.

Attorney Matthew Wolper

Attorney Matthew WolperMatt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]