On June 4, 2020, FINRA, the Financial Industry Regulatory Authority, announced that it has ordered Merrill Lynch to pay $7.2 million to investors who were charged excessive fees in connection with mutual fund transactions, according to Financial Advisor IQ. The self-regulatory authority is calling this the “largest restitution case in 2020 to date.”
Why must Merrill Lynch pay $7.2 million to certain mutual fund investors? FINRA’s Department of Enforcement asserts that Merrill Lynch did not have proper supervisory systems in place to make sure that customers received sales charge waivers and fees rebates. Mutual fund issuers generally give customers a “right of reinstatement,” allowing customers to re-purchase shares of a fund (or shares of a fund in a similar fund family) after selling them—without incurring a front-end sales charge. FINRA asserts that Merrill Lynch did not do this, instead allowing customers in 13,000 accounts to rack up millions of dollars in fees. The activity in question took place between April 2011 and April 2017, during which time Merrill Lynch relied on registered representatives to manually apply waivers and rebates. Given how many customers and accounts were involved, this system placed an undue burden on these brokers, who, not unexpectedly, made a lot of mistakes. Furthermore, Merrill Lynch had only set up its alerts to identify recent mutual fund transactions even though customers were entitled to fee waivers for up to a year after purchasing a mutual fund.
While FINRA has recognized Merrill Lynch’s “extraordinary cooperation” in this case, these oversights should never have happened to begin with. Brokerage firms, no matter their size, must have specific procedures in place and must execute these procedures. This is even more important when it comes to major players like Merrill Lynch. A high number of customer accounts is not an excuse for poor supervision.
This is far from the first time that FINRA has sanctioned a brokerage firm for failing to implement the “right of reinstatement concerning mutual funds. In 2016, FINRA found that UBS Financial Services failed to provide approximately 2,700 customers with mutual fund fee waivers to which they were entitled. This resulted in the customers paying $277,636 in excess fees and charges.
If you have questions about the “right of reinstatement” or mutual fund front-end sales charges, don’t hesitate to contact the securities attorneys of Fitapelli Kurta. Call (877) 238-4175 or email firstname.lastname@example.org for your free case consultation with a securities attorney.