FINRA Fines Merrill Lynch for Supervisory Failures, Orders $1.5 Million in Restitution

The Financial Industry Regulatory Authority (FINRA) has reached a settlement with Merrill Lynch, Pierce, Fenner & Smith Incorporated over supervisory failures that resulted in customers paying nearly $1.5 million in avoidable fees. The firm has agreed to pay full restitution to affected customers and accept a censure.

According to the Letter of Acceptance, Waiver, and Consent (AWC) filed by FINRA, from January 2018 through June 2022, Merrill Lynch failed to establish and maintain a supervisory system and written procedures reasonably designed to ensure that its registered representatives had a reasonable basis to believe their recommendations were suitable or in each customer's best interest.

The issue centered around certain products eligible for advisory fee waivers. Merrill Lynch offers customers a 12-month waiver of otherwise-applicable advisory fees on certain new-issue products, but only if the products are purchased initially in an advisory account. However, in over 2,000 instances, firm representatives recommended that customers purchase these products in a brokerage account and then promptly transfer them to an advisory account, causing customers to incur unnecessary expenses.

FINRA found that Merrill Lynch's supervisory system, policies, and procedures failed to address the unique characteristics of these securities products. The firm did not have measures in place to detect the purchase of fee-waiver eligible products in brokerage accounts followed by their transfer to advisory accounts.

As a result of these failures, Merrill Lynch was found to have violated FINRA Rules 3110 and 2010. Additionally, for the period from June 30, 2020, to June 30, 2022, the firm was found to have violated the Compliance Obligation of the Securities and Exchange Commission's Regulation Best Interest (Reg BI).

In resolving this matter, FINRA acknowledged Merrill Lynch's extraordinary cooperation, including conducting an internal review, implementing remedial measures, and agreeing to pay full restitution to affected customers.

Merrill Lynch has agreed to pay $1,486,380 in restitution to 1,361 affected customers, plus interest. The firm neither admitted nor denied the findings but consented to the entry of FINRA's findings.

This case underscores the importance of robust supervisory systems and procedures in financial firms to protect customer interests and ensure compliance with regulatory requirements.

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