By Erwin J. Shustak, Esq. and Holly Nicoll, Law Clerk of Shustak Reynolds & Partners, P.C. posted on Tuesday, June 16, 2020.

Erwin J. Shustak

Managing Partner

Location: San Diego, California
New York, New York
Phone: (619) 696-9500 (Ext. 109)
(800) 496-5900 (Ext. 109)
Email: [email protected]

FINRA recently announced that Merrill Lynch will pay $7.2 million in restitution to customers overcharged on mutual fund accounts.  FINRA’s enforcement action and fine affects over 13,000 separate Merrill Lynch accounts whose owners did not receive the available sales charge waivers and fee rebates available through rights of reinstatement.  According to FINRA, rights of reinstatement allow investors to purchase shares of a fund after previously selling shares of that fund or another fund in the same fund family, without incurring a front-end sales charge, or to recoup all or part of a contingent deferred sales charge.  The overcharges impacted customers in the aggregate amount of approximately $6 million.  FINRA considers this to be a “Supervisory Failure” by Merrill Lynch.

FINRA charged that Merrill Lynch failed to establish reasonable systems and procedures to ensure that all accounts eligible to receive these sales charge waivers and fee rebates actually received them.  According to the FINRA charges, Merrill Lynch relied on individual registered representatives to manually determine customer eligibility rather than using an automated system with sufficient supervisory checks and balances to ensure that every eligible account actually received the rebates and waivers.  FINRA charged that between April 2011 and April 2017, Merrill’s supervisory failure lead to the affected Merrill customers paying in the aggregate approximately $6 million in excess sales charges and fees.   And this was not an isolated instance of Merrill’s supervisory failure in this area.  In 2011, Merrill agreed to a censure for a similar violation, $8 million in fines and approximately $24.2 million in restitution for supervision and suitability violations regarding the sales of mutual fund shares.  Sometimes Merrill and other firms just don’t learn from their costly mistakes.

FINRA took Merrill Lynch’s “extraordinary cooperation” into consideration when determining the appropriate monetary sanction on the new violations.  Merrill agreed to hire an outside consulting firm to identify customer accounts impacted by this oversight and calculate the total remediation.  Merrill Lynch also assisted the FINRA investigation and promptly paid the restitution to impacted customers.  Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

We greatly appreciate Holly Nicoll's contribution to our firm!  Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.  We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes and related matters.  Please direct any questions to our managing partner, Erwin J. Shustak, Esq. and contact us today for a confidential, complimentary consultation.

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