In this latest action, Merrill Lynch agreed to a censure and must pay more than $15.2 million in restitution and interest to thousands of its customers who purchased Class C mutual fund shares when Class A shares were available at substantially lower costs, FINRA announced June 2.
Mutual fund issuers offer different classes of mutual fund shares, including Class A and Class C shares. Generally, Class A shares are subject to a front-end sales charge, while Class C shares typically don’t carry a front-end sales charge but have ongoing fees and expenses that are higher than those of Class A shares.
Many mutual fund issuers allow customers to purchase Class A shares without a front-end sales charge if the purchase exceeds certain thresholds. If a customer qualifies to purchase Class A shares without a front-end sales charge, there’d be no reason for the customer to purchase Class C shares with higher annual expenses.
“From January 2015 to January 2021, Merrill Lynch failed to establish and maintain a supervisory system reasonably designed to supervise sales of mutual fund Class C shares,” FINRA stated in its order. “In particular, the firm failed to correctly identify and implement applicable limits on customers’ Class C share purchases, which resulted in customers purchasing Class C shares when Class A shares were available, typically at a lower cost.” As a result, customers paid approximately $13.4 million in excess fees and expenses.
‘Extraordinary Cooperation’
For these actions, Merrill Lynch violated FINRA Rules 3110 and 2010, FINRA stated. This conduct overlapped with similar activity being engaged in by Merrill, as noted in FINRA’s notice.
Yet, FINRA stated that it didn’t impose a fine due to the firm’s “extraordinary cooperation and substantial assistance with the investigation.” Specifically, FINRA stated that Merrill Lynch “voluntarily and proactively conducted an internal review, engaged an outside consultant to identify affected customers and calculate remediation, and established a remediation plan to repay customers and convert shares, where applicable.”
Jessica Hopper, executive vice president and head of FINRA’s Enforcement Department, had this message to offer other firms: “FINRA member firms must have supervisory 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.”
“We want 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,” Hopper added.
In settling this matter, Merrill Lynch accepted and consented to the entry of FINRA’s findings without admitting or denying them. 
PHOTO: ‘Merrill Lynch,” By Hänsel und Gretel, used under license CC BY-SA 3.0.
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.