Merrill Lynch will pay a fine of $8 million for failing to waive mutual fund sales charges to approximately 41,000 small-business retirement plan accounts and 6,800 plans for charities, ministers and public-school workers.
The Financial Industry Regulatory Authority also ordered Merrill Lynch, a unit of Bank of America, to pay $24.4 million in restitution to affected investors, in addition to $64.8 million already made in payments to aggrieved clients.
The origins of the action date back to 2006. Merrill Lynch’s retail platform offered waivers of initial sales charges to Class A shares of mutual funds to retirement plan accounts, and disclosed those waivers in the prospectuses issued to investors.
Class A shares typically have lower fees than class B and C shares, but the Class A shares include an upfront sales charge. Mutual funds will commonly waive the upfront sales fee for group plan retirement accounts.
But at various times since at least 2006, Merrill Lynch did not waive the sales charge of Class A shares to accounts in retirement plans, according to settlement papers released today. Merrill Lynch, FINRA said, learned that its small business retirement plan customers were overpaying in 2006, but failed to report the conflict for more than five years.
FINRA’s investigation found systemic procedural supervisory failures by Merrill Lynch. Once the firm learned that it was failing to provide waivers to eligible accounts, Merrill failed to communicate with its advisory team that the charges needed to be waived or properly train its team of advisors about the lower-cost alternatives to qualified plans, FINRA said.
Merrill Lynch’s exposure to future potential litigation will depend on arbitration clauses in the contracts with the plans involved. Some contracts are written such that all grievances may only be litigated through FINRA’s internal arbitration process.
In consenting to the fines and settlement, Merrill Lynch neither admitted nor denied the charges.
“Following Bank of America’s acquisition of Merrill Lynch, we concluded that certain Merrill Lynch clients did not receive fee waivers for which they were eligible,” Bill Halldin, a Bank of America spokesman, said in an e-mail to Bloomberg News. “We notified FINRA about our findings and voluntarily began making refunds.” Merrill Lynch was acquired by Charlotte, North Carolina-based Bank of America in 2009.