Merrill Lynch hit with $11.65 million penalty by Finra

In 2016, Finra launched a targeted examination of UIT sales, discounts and rollovers across the brokerage industry, and a number of firms have incurred penalties and fines in its aftermath.

The Financial Industry Regulatory Authority Inc. on Friday said it ordered Merrill Lynch & Co Inc. to pay an $11.65 million penalty stemming from potentially excessive sales charges in connection with early rollovers of Unit Investment Trusts.

In September 2016, Finra launched a targeted examination of UIT sales, discounts and rollovers across the brokerage industry, and a number of firms have incurred penalties and fines in its aftermath.

According to the settlement, Merrill Lynch will pay more than $8.4 million in restitution to more than 3,000 customers who incurred the excessive sales charges. Finra also fined the firm $3.25 million for failing to reasonably supervise early UIT rollovers.

From 2011 to 2015, more than 3,000 Merrill Lynch clients were hit with the sales charges.

UITs are a portfolio of securities sold as a one-time offering that ends on a specific date, usually up to two years, and are generally intended as long-term investments with sales charges based on their long-term nature, including an initial and deferred sales charge and a creation and development fee, according to Finra.

The trades — including approximately $2.5 billion in which the investments were sold more than 100 days before their maturity dates, and some or all of the proceeds were used to purchase other UITs — were deemed to be “early rollovers” by Finra. The regulator found that Merrill Lynch’s supervisory system was not reasonably designed to identify those early rollovers.

In settling this matter, Merrill Lynch neither admitted nor denied the charges. “We have addressed these concerns through enhancements to our supervisory system,” a Merrill Lynch spokesperson wrote in an email.

Finra and the Securities and Exchange Commission have been cracking down on broker-dealers for missing discounts to client on UIT for several years.

A little more than a year ago, Finra imposed more than $3.6 million in sanctions on Stifel Nicolaus & Co. Inc. for violations involving the sales of unit investment trusts.

In 2019, broker-dealers under the Raymond James brand and network agreed to pay $15 million as part of a settlement with the SEC, which found that the businesses had improperly charged advisory fees on inactive retail client accounts and charged excess commissions for brokerage customers, who bought certain unit investment trusts.