On June 16, 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated entered into a Letter of Acceptance, Waiver and Consent with the Financial Industry Regulatory Authority to settle alleged rule violations in connection with the firm’s failure to apply mutual fund sales charge waivers at various times since at least January 2006 for approximately 41,000 small business retirement plan accounts and approximately 6,800 accounts of charitable organizations and 403(b) retirement accounts available to ministers and employees of public schools. Although most of the mutual funds available on Merrill Lynch’s platform offered waivers of front-end sales charges for the eligible retirement plan accounts and charities and disclosed those waivers in their prospectuses, FINRA alleged that Merrill Lynch treated the eligible accounts in the same manner as non-retirement or ordinary retail customer accounts and, as a result, the eligible accounts either unnecessarily paid sales charges when purchasing shares, or purchased other share classes that subjected them to higher ongoing fees and expenses.
With respect to the small business retirement plan accounts, FINRA alleged that certain supervisory, compliance and legal personnel at Merrill Lynch became aware in 2006 that such accounts were being disadvantaged by not purchasing the most favorable Class A shares with sales charge waivers, but the firm elected not to notify its financial advisers and, in fact, allowed its financial advisers to sell Class A shares with front-end sales charges or more costly Class B and Class C shares to these accounts until 2011. FINRA also alleged that Merrill Lynch’s policies and procedures for mutual fund purchases on its retail brokerage platform, where the small business retirement plan accounts at issue were maintained, were not designed to adequately supervise the administration of mutual fund sales charge waivers for such accounts. Merrill Lynch formed an internal task force to evaluate the small business retirement plan account problems and, after determining that the firm’s systems and procedures were not designed to systematically identify and provide mutual fund Class A sales charge waivers to such eligible accounts, recommended that the firm develop and implement technological improvements that would permit the firm to more readily identify customer accounts eligible for sales charge waivers. However, FINRA alleged that development work on the improvements was never fully funded or implemented. In addition, FINRA alleged that Merrill Lynch advised its sales force in October 2010 that financial advisers were responsible for determining whether a sales charge waiver was available pursuant to mutual fund prospectuses, but did not provide its financial advisers or supervisors with any other guidance or training to determine whether accounts qualified for such waivers. Similarly, according to FINRA’s allegations, Merrill Lynch solely relied upon its financial advisers to determine opportunities for 403(b) retirement accounts and accounts for charitable organizations to purchase shares with sales charge waivers, but did not have adequate written policies or procedures to help financial advisers or supervisors determine the eligibility of such accounts, and did not have controls to detect instances in which sales charge waivers should have been applied.
FINRA concluded that Merrill Lynch failed to establish and maintain an adequate supervisory system and written procedures to identify Class A mutual fund sales charge waivers in fund prospectuses, failed to adequately notify and train its financial advisers regarding mutual fund sales waiver eligibility requirements, and failed to have an adequate supervisory system to ensure that eligible accounts purchased Class A shares with sales charge waivers, resulting in violations of NASD Rules 3010 and 2110 and FINRA Rule 2010. Merrill Lynch consented to a censure and a fine of $8 million and agreed to pay $24.4 million in restitution to affected customers, in addition to $64.8 million the firm already paid.