Merrill Lynch to reimburse customers $1.5 million over avoidable fees

Merrill Lynch has been ordered to reimburse customers approximately $1.5 million due to supervisory lapses that led to avoidable fees on more than 2,000 accounts.

In an AWC published Monday, Finra stated that from January 2018 until June 2022, Merrill Lynch's representatives had advised customers to buy products in brokerage accounts rather than advisory accounts, which would have made the customers eligible for fee waivers.

According to the regulator, the firm did not establish a supervisory system to ensure that the recommendations were suitable or in the customers' best interests.

“Merrill Lynch offers customers a 12-month waiver of otherwise-applicable advisory fees on certain new-issue products, if, and only if, the products are purchased initially in an advisory account,” Finra explained in its disciplinary letter.

“Notwithstanding this benefit, from January 2018 to June 2022, in certain instances [the firm’s] registered representatives recommended that customers purchase such products in a brokerage account and then promptly recommended the transfer of those same products to an advisory account.”

The recommendations that prioritized purchases in brokerage over advisory accounts led to unnecessary expenses, Finra said, particularly through advisory fees that could have been avoided if the purchases were made through advisory accounts first.

All in all, the registered reps for Merrill Lynch made those unfavorable recommendations to over 1,300 customers, according to Finra.

While the firm had policies, procedures, and automated surveillance tools to catch potentially unsuitable recommendations in brokerage accounts, those guardrails didn’t account for when products qualified for advisory fee waivers are purchased in brokerage accounts first, Finra said.

Because of that blind spot in compliance, Finra said Merrill Lynch violated Rule 2111 on suitability, which requires representatives to have "a reasonable basis to believe that a recommendation of a transaction or investment strategy involving a security of securities to any customer is suitable for the customer," prior to June 2020. After that, the firm failed to act in clients' best interests under the SEC’s Reg BI framework, it said.

Due to these supervisory failures, Finra has mandated Merrill Lynch to pay restitution of $1,486,380 plus interest to 1,361 customers.

Finra acknowledged Merrill Lynch's cooperation in resolving the suitability issue, noting the firm's internal review to identify affected customers and calculate the reimbursement amount.

This is the second time in two months that Finra has penalized Merrill Lynch, Pierce, Fenner & Smith, the investment and wealth management division of Bank of America. In May, the regulatory agency fined Merrill $825,000 for lapses in supervising the timeliness of order executions and maintaining accurate records.

Morgan Stanley also recently found itself in hot water over alleged Reg BI violations. According to a class action lawsuit filed in the US District Court for the Southern District of New York, the firm breached its fiduciary duty by offering much lower interest rates compared to competitors on its client cash sweep accounts, while not disclosing that fact to its customers.