The Financial Industry Regulatory Authority (“FINRA”) said yesterday that it has fined Merrill Lynch $500,000 for failing to provide sales charge discounts to customers on eligible purchases of Unit Investment Trusts (“UITs”). Further, FINRA found that Merrill Lynch failed to have an adequate supervisory system in place to ensure customers received appropriate UIT discounts. Merrill Lynch also agreed to provide remediation of more than $2 million to affected customers.
“Firms have been on notice since at least 2004 that they must develop and implement procedures to ensure customers receive appropriate sales charge discounts for UIT investments,” said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “In this case, it was critical for the firm to ensure that its brokers were diligent in providing sales charge discounts to which customers were entitled. This failure resulted in increased investment costs to Merrill’s customers.”
A UIT is a type of investment company that offers redeemable units, of a generally fixed portfolio of securities, that terminate on a specific date. UIT sponsors generally offer sales charge discounts to investors, known as “breakpoint discounts” and “rollover and exchange discounts.”
A breakpoint discount is a reduced sales charge based on the dollar amount of the purchase – the higher the amount the greater the discount. Breakpoints generally function as a sliding reduction in the sales charge percentage available for purchases, usually beginning at $25,000 or $50,000 (or the corresponding number of units).
A rollover or exchange discount is a reduced sales charge that is offered to investors who use the termination or redemption proceeds from one UIT to purchase another UIT.
In March of 2004, the NASD n/k/a FINRA issued a Regulatory Notice to firms titled, Unit Investment Trust Sales. (A copy of the Regulatory Notice can be found here: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p003157.pdf)
The Notice reminds broker-dealers that they should develop and implement procedures to ensure customers receive appropriate sales charge discounts for UITs.
FINRA found that before May 2008, Merrill Lynch’s written supervisory procedures had little to no information or guidance regarding UIT sales charge discounts. Even after the firm established procedures addressing UIT sales charge discounts, the procedures were inaccurate and conflicting.
FINRA also determined that Merrill Lynch’s procedures lacked substantive guidelines, instructions, policies or steps for brokers or their supervisors to follow to determine if a customer’s UIT purchase qualified for and received a sales charge discount. As a result of its defective procedures, between October 2006 and June 2008, the firm failed to appropriately apply discounts on rollover and breakpoint purchases resulting in customers being overcharged on their UIT purchases.
According to FINRA, Merrill Lynch also approved for distribution, and for use in client presentations, inaccurate and misleading UIT sales literature. The presentation discussed sales charge discounts, but led clients to believe that they were only entitled to a discount if they used UIT proceeds to purchase a new UIT offered by the same sponsor.
As part of the settlement, Merrill Lynch is providing restitution to all customers who were overcharged when purchasing UITs through the firm, from January 2006 to the present. Merrill Lynch settled this matter without admitting or denying the allegations, but consented to the entry of FINRA’s findings.