Merrill Lynch Mutual Fund Charges Draw $100M in Fines, Fees by FINRA

Merrill Lynch has been fined $8 million for overcharging mutual fund customers, and the brokerage will pay back a total of $89 million to charities and retirement accounts.  

The Financial Industry Regulatory Authority (FINRA) announced the fines against Merrill Lynch on June 16, indicating that the firm should have waived mutual fund sales charges for some charities and retirement funds, but failed to do so.

The waivers were spelled out in most of the prospectuses of the group’s mutual funds, but the company failed to provide the waivers at various times since January 2006.

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FINRA found that Merrill Lynch overcharged about 41,000 small business retirement plan accounts, and about 6,800 charities and 403(b) retirement accounts available to ministers and public school employees. The overcharges came when the company offered Class A shares, which typically have lower fees than Class B and C shares, but involve an initial sales charge.

The investigation determined that Merrill Lynch did not have adequate supervisory procedures to instruct its financial advisors on the mutual fund sales charge waivers, which are traditionally handed out to charities and certain retirement funds industry-wide. The company just relied on its financial advisors to give the waivers without any mechanism for making certain they did so.

FINRA’s investigation also determined that Merrill Lynch knew about the problem since at least 2006, but continued to fail to address the issue for more than five years.

Merrill Lynch has already paid $64.8 million to investors in restitution, and FINRA has ordered it to pay another $24.4 million to overcharged customers, in addition to the $8 million fine.

FINRA is a non-governmental agency that acts as a self-regulatory agency for investment firms. It was created in July 2007, as a successor to the National Association of Securities Dealers, handling all disputes between investors and stockbrokers or other financial firms. FINRA arbitrators resolve stock broker fraud claims that can include charges of breach of contract, breach of fiduciary duty, negligence, misrepresentation, unauthorized trading and other claims that investments were improperly handled.

“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,” Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said in the press release. “When firms fail to do so, we will take appropriate action.”

When accepting the fines, Merrill Lynch did not admit to or deny the charges.


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