Merrill Lynch resolves mutual fund overcharging case

U.S. regulators ordered brokerage firm Merrill Lynch Pierce Fenner & Smith Inc. to pay US$15.2 million in restitution to clients who were put into a pricier category of mutual funds when a cheaper option was available.

The U.S. Financial Industry Regulatory Authority Inc. (FINRA) settled the case with Merrill, which agreed to pay restitution and interest to thousands of customers who purchased class C mutual fund shares instead of class A shares that “were available at substantially lower costs.”

FINRA noted that class A shares generally carry a front-end sales charge, whereas class C shares typically have no upfront charge but impose higher ongoing fees and expenses. However, many fund companies waive the front-end charge on class A shares for purchases that exceed certain thresholds.

“If a customer qualifies to purchase class A shares without a front-end sales charge, there would be no reason for the customer to purchase class C shares with higher annual expenses,” the self-regulatory organization said.

While Merrill Lynch had an automated system that was meant to prevent clients from buying class C shares when they were eligible to purchase cheaper class A shares, that system “often failed to correctly identify and implement applicable purchase limits on class C shares,” it said.

As a result, FINRA said thousands of the firm’s clients purchased pricier class C shares.

“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,” said Jessica Hopper, executive vice-president and head of enforcement with FINRA, in a statement.

“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,” she added.

Along with paying restitution, the firm, which settled the case without admitting or denying FINRA’s findings, also agreed to convert clients’ class C shares to class A shares to take advantage of the lower ongoing costs.

FINRA said it did not impose a fine on Merrill “due to the firm’s extraordinary cooperation and substantial assistance with the investigation,” including voluntarily carrying out an internal review, hiring an outside consultant to help develop a remediation plan, and following through on that plan to compensate customers.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.