Bank of America Merrill Lynch is set to pay $2.5 million in restitution and fines after failing to provide discounts to customers on a certain type of redeemable security, the brokerage industry's primary regulator said on Wednesday.
FINRA imposed a $500,000 fine on the brokerage firm plus an additional $2 million in restitution to be paid to customers who did not receive the anticipated "sales charge discounts" on unit investment trusts.
According to FINRA, Merrill Lynch allegedly failed to track whether a customer was receiving the appropriate amount of UIT discounts.
Bill Holden, a Merrill Lynch spokesperson, said in a statement that the firm is working to reimburse the affected clients as soon as possible.
In a UIT, redeemable units of a fixed portfolio of securities are issued. The units terminate on a specific date. The firms that sponsor UITs frequently offer sales charge discounts to investors, commonly referred to as “breakpoint discounts,” and “rollover and exchange discounts.”
In 2004, FINRA distributed a Regulatory Notice to firms who provide UIT sales to investors. The notice indicated that firms should implement stringent procedures to ensure that customers receive maximum service of sales charge discounts.
FINRA claims that prior to May 2008, Merrill Lynch supervisory procedures failed to provide accurate substantive guidelines regarding sales charge discounts, which often resulted in a series of conflicts.
Due to the faulty guidelines, brokers and their supervisors were unable to provide the necessary information needed in determining if a customer’s UIT purchase qualified for and received the right amount of sales charge discount. Then, between October 2006 and June 2008, Merrill Lynch did not accurately apply discounts on rollover and breakpoint purchases resulting in customers being overcharged.
The brokerage further approved the use of its defective procedures for client presentations, which led clients to believe that they qualified for discounts upon the purchase of a new UIT offered by the same sponsor.
"Firms have been on notice since at least 2004 that they must develop and implement procedures to ensure customers receive appropriate sales charge discounts for UIT investments," said James S. Shorris, FINRA executive vice president and acting chief of enforcement. “In this case, it was critical for the firm to ensure that its brokers were diligent in providing sales charge discounts to which customers were entitled. This failure resulted in increased investment costs to Merrill's customers.”
Earlier in this month, Merrill was slapped with a fine over a New Jersey trading fiasco where the brokerage agreed to pay $728,260 in civil penalties for allowing unregistered client associates to sell securities in states where they were not permitted to do business.
Aarti N. Maharaj writes for On Wall Street.