News & Insights

Merrill Lynch, Peirce And Fenner & Smith, Inc. Fined 15.2 Million By Finra For Sales Of Class C Mutual Fund Shares

FINRA has announced Merrill Lynch, Peirce and Finner & Smith, Inc. was fined more than $15.2 million for restitution owed to customers who purchased Class C mutual funds shares despite the availability of Class A mutual fund shares. In differentiating between the two types of mutual fund shares, FINRA noted Class A shares are subject to a front-end sales charge, in contrast to Class C shares, which are not subjected to front-end sales charges, but instead have ongoing fees and expenses that are higher than those associated with Class A shares. In many instances, mutual fund issuers allow customers to purchase Class A shares without incurring a front-end sales charge if the total purchase exceeds certain thresholds. FINRA noted that in instances where a customer qualified for the purchase of Class A shares without a front-end sales charge, there “would be no reason for the customer to purchase Class C shares with a higher annual expense.”

Merrill Lynch was individually referenced during the announcement of the imposed fine for its automated system which was designed to restrict a customer’s purchase of Class C shares when lower cost Class A shared were available. FINRA found the system often failed to correctly identify or restrict the purchase of Class C shares. The system failure resulted in thousands of Merrill Lynch customers purchasing Class C shares despite Class A shares being available to purchase at a substantially lower cost.

When announcing the decision to fine Merrill Lynch, Peirce and Finner & Smith, Inc., Executive Vice President and Head of FINRA’s Department of Enforcement, Jessica Hopper, reminded FINRA members that “FINRA member firms must have supervisors systems reasonably designed to ensure that customers are aware of, and receive, available discounts when purchasing mutual funds, and are not charged unnecessary fees and expenses.” She further explained that FINRA wants “to remind and encourage firms to proactively detect, fix, and remediate these types of supervisory issues to realize the benefits of extraordinary cooperation when warranted.” In addition to the ordered restitution, Merrill Lynch has agreed to convert certain customers existing Class C shares to Class A shares, where appropriate.

We recommend our clients to use the FINRA Fund Analyzer when recommending mutual funds to customers, print a copy and save in the customer file so that you can defend against these allegations in both regulatory matters or in an arbitration.