The Financial Industry Regulatory Authority has censured and ordered Merrill Lynch to pay approximately $15.2 million ($13.4 million, plus interest) in restitution to customers who were charged excessive fees relating to mutual fund purchases. The regulator did not fine Merrill for the violation due to its “extraordinary cooperation” in the matter.
Mutual fund issuers offer different classes of mutual fund shares, including Class A and Class C shares. Typically, Class A shares have a front-end sales charge, while Class C shares do not, but instead, have higher annual expenses and are often subject to a deferred sales charge.
Many mutual fund issuers allow customers to purchase Class A shares with a discounted front-end sales charge, or with no front-end sales charge, if the purchase exceeds certain volume thresholds.
Merrill Lynch’s automated system was designed to prevent Class C share purchases when Class A shares were available to purchase at NAV or at a discount. Although the firm’s automated system correctly calculated customer purchases and fund holdings, FINRA said that in certain instances the system mistakenly applied a purchase limit on Class C shares that was inconsistent with a fund’s Class C share purchase limit, or inconsistent with a fund’s threshold for when Class A shares were available at net asset value. As a result, thousands of customers purchased Class C shares, incurring fees and charges, when Class A shares were available at a lower cost.
According to FINRA, from January 2015 to January 2021, Merrill Lynch customers paid approximately $13.4 million in excess fees and expenses.
FINRA noted Merrill’s “extraordinary cooperation” and “substantial assistance” for its role in initiating, after discovery, an “extensive review” of the firm’s systems relating to Class C mutual fund sales. The firm also engaged an outside consultant at “considerable expense” to identify affected customers and “promptly established” a plan to provide remediation to affected customers.
Merrill Lynch is a full-service brokerage firm with approximately 31,000 registered representatives and 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.