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Merrill Lynch Mutual Funds: FINRA Fines Firm for Overcharging Investors

Jun 21, 2022 Current Investigations

On June 1, 2022, the Financial Industry Regulatory Authority alleged that Merrill Lynch mutual fund investors had overpaid for Class C mutual funds. FINRA ordered Merrill Lynch to pay $15.2 million to its investors—$13.4 million to repay unnecessary expenses and broker fees, with an additional $1.8 million in interest. Representatives for the firm allegedly recommended expensive Class C mutual funds to investors who qualified for lower-cost Class A mutual funds.

In the event investors qualified for cheaper Class A mutual funds, Merrill Lynch’s system should have automatically flagged these Class C mutual fund purchases for review. This failure allegedly lasted from January 2015 to January 2021. Firms owe it to their investors to ensure their supervisory systems catch overcharges.

FINRA’s most recent Merrill Lynch mutual fund allegations should serve as a reminder to investors to ask questions before choosing Class C shares of a mutual fund. Always double check if you qualify for a Class A share instead.

What is the Difference Between a Class A and Class C Merrill Lynch Mutual Fund?

Class A mutual funds have lower expense ratios than other types of funds. They charge higher upfront fees, but they cost significantly less over time. This makes them better suited to clients who are planning to hold their investment for a long period.

Class C mutual funds charge a sales fee (also known as a “sales load”) as a percentage of the assets. There is no upfront fee, but the asset percentage fee gradually eats away at the investor’s profits. Class C shares are also often subject to a contingent deferred sales charge, which investors do not have to pay for Class A shares.

If investors buy more shares of a Class A mutual fund, they may qualify for lower fees, also known as a “breakpoint discount.” Investors can take advantage of breakpoint discounts with a Letter of Intent, stating that they plan to buy more shares over a period of 13 months. These types of discounts are not available with other classes of mutual funds.

FINRA Rule 3110: Firm Supervision

FINRA Rule 31110 requires firms to supervise their brokers as well as their recommendations. Each firm is responsible for creating a supervisory system that catches something like the recommendation of unnecessarily expensive Class C mutual funds.

Merrill Lynch Regulatory Actions: Investors Take Note

Merrill Lynch has a long history of regulatory actions. There are a total of 1,466 regulatory actions and cease-and-desist orders in the firm’s detailed BrokerCheck record.

Failure to Comply with FINRA Investigation

For example, in a disclosure dated December 20, 2021, FINRA alleged that Merrill Lynch failed to produce timely and complete information in connection with FINRA’s investigation of two brokers at the firm. This alleged failure violates FINRA Rule 8210, which states that firms must produce information verbally, electronically, or in writing, in connection with a FINRA investigation or a complaint.

Investors accused Merrill Lynch brokers of unauthorized trading and selling away. While Merrill Lynch eventually produced information in response to FINRA, FINRA noted some apparent omissions. Finally, Merrill Lynch produced emails that the firm’s supervisory system had flagged.

FINRA fined Merrill Lynch $1.2 million.

You can review the allegations here.

Merrill Lynch’s Supervisory System Allegedly Not Designed to Detect Theft

Another recent Acceptance, Waiver, and Consent agreement (AWC) from December 20, 2021, alleges that Merrill Lynch failed to supervise. The AWC states that Merrill Lynch failed to design a supervisory system that would catch theft by Merrill Lynch representatives.

Supervisory systems should flag transactions between customers and brokers where the broker is named as a beneficiary. Unfortunately for their customers, Merrill Lynch brokers were tasked with clearing alerts generated by those transactions. This made it possible for two representatives to steal from customers for years. In total, they allegedly stole approximately $6 million.

FINRA imposed a fine of $950,000.

You can read a copy of the AWC here.

What Should I Do If I Lost Money Investing in a Merrill Lynch Mutual Fund?

These most recent disputes are only a small sample of the customer disputes and regulatory actions brought against Merrill Lynch. Make sure to regularly review your account statements, and if you have concerns about mutual funds or other Merrill Lynch investments, contact a Kurta Law investment attorney today. Call (877) 600-0098 or email info@kurtalawfirm.com.