Articles Posted in Merrill

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On April 30, 2024, a class action was filed against Merrill Lynch in the Western District Court of North Carolina to recover the deferred compensation that Merrill Lynch cancelled upon Plaintiffs’ voluntary resignation.  While we believe there are strong claims against Merrill Lynch for violation of ERISA, we believe that they must be arbitrated at FINRA.  See Regulatory Notice 16-25 here.  Lax & Neville is pursuing arbitration claims on behalf of former Merrill Lynch advisors for their cancelled deferred compensation comprised of both Long-Term Incentive (LTI) Cash Plans/WealthChoice and Restricted Stock Units (RSUs).

In a similarly situated class action, Shafer, et. al. v. Morgan Stanley, et. al., the Plaintiffs, former Morgan Stanley financial advisors, sued Morgan Stanley in December 2020 to recover their deferred compensation, which was cancelled by Morgan Stanley when those advisors voluntarily resigned.  Morgan Stanley moved to compel those advisors’ claims to FINRA arbitration.  On November 21, 2023, almost three years after the filing of the Complaint, the Federal Court granted Morgan Stanley’s motion requiring any Morgan Stanley advisor who wants to recover their deferred compensation to file FINRA arbitration claims against Morgan Stanley.  See the Court’s Order and Opinion here.  For more information on the Morgan Stanley decision, see here.

Our firm has extensive experience successfully pursuing deferred compensation claims in FINRA arbitration.  Most recently, we have won more than $35 million in unpaid deferred compensation, interest, costs, and attorneys’ fees for more than two dozen former Credit Suisse investment advisers, and we represent dozens of Morgan Stanley financial advisors seeking to recover their deferred compensation.

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Recently, the Financial Industry Regulatory Authority (“FINRA”) Department of Enforcement fined and suspended an ex-Merrill registered financial advisor, who had been in the industry for nearly 35 years, for breaching FINRA Rule 2010 and firm policy by violating his duty to maintain the confidentiality of a customer’s nonpublic information.  Merrill Lynch’s Employment Agreement also requires a financial advisor to preserve the confidentiality of nonpublic customer information and refrain from taking and disclosing such information upon termination of their employment.  Customers’ nonpublic information, including dates of birth, social security and driver’s license numbers, account numbers, and tax information, is also protected under Regulation S-P.  FINRA Letter of Acceptance, Waiver, and Consent No. 2021071850601, 2 (2021).

The financial advisor’s violative conduct consisted of taking pictures of confidential client information from the Merrill Lynch electronic systems.  According to FINRA, the advisor took photographs, which contained customers’ names, dates of birth, social security numbers, and account numbers, for approximately 35 clients and advised the junior members of his team to take similar photos for at least 100 other customers.  These photos were taken in anticipation of transitioning to another brokerage firm. When the advisor and his team resigned from Merrill Lynch, they retained the nonpublic personal information of customers.  The information “was secured by the firm through which [the advisor] had become registered, and the firm returned the customers’ nonpublic personal information to Merrill Lynch prior to its use.”  Id.

The advisor executed a letter of Acceptance, Waiver, and Consent (“AWC”) wherein he accepted the finding of a violation, consented to the imposition of sanction, and agreed to waive the right to a hearing before any panel, court, or administrative body.  The FINRA AWC states that the Merrill Lynch advisor “improperly retained the customers’ nonpublic personal information” when transitioning to a new firm in violation of FINRA Rule 2010.  Id.  FINRA suspended the financial advisor for 10 workdays and fined him $5,000.

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The Securities and Exchange Commission (“SEC”) announced this month that four investment advisory firms—Merrill Lynch, RBC Capital Markets, Eagle Strategies, and Cozad Asset Management—agreed to pay $4.72 million to settle charges that they recommended and sold mutual share classes to its customers when cheaper shares were available to those investors.  The majority of that sum, namely, $3.88 million, is attributable to RBC Capital Markets.  The mutual fund fee disgorgements resulting from the settlements with the SEC are part of the SEC’s initiative, launched in February 2018, wherein the SEC agreed to waive civil penalties against investment advisers who self-reported and admitted that they had been putting investors into high-fee mutual fund classes and agreed to reimburse those customers.  These settlements are the last ones the SEC will accept as it concludes the mutual fund amnesty program.

A mutual fund share class represents an interest in the same portfolio of securities with the same investment objective, with the primary difference being the fee structures.  For example, some mutual fund share classes charge what are called “12b-1 fees” to cover fund distribution and sometimes shareholder service expenses.  Many mutual funds, however, also offer share classes that do not charge 12b-1 fees, and investors who hold these shares will almost always earn higher returns because the annual fund operating expenses tend to be lower over time.

In the various cease and desist orders, the SEC found that Merrill Lynch, RBC Capital Markets, Eagle Strategies, and Cozad Asset Management purchased, recommended or held for their clients mutual fund share classes that paid the firms or the advisors 12b-1 fees instead of lower cost share classes of the same funds for which their customers are also eligible.  The firms also failed to disclose these conflicts of interest, either in its Forms ADV or otherwise, related to their receipt of 12b-1 fees and/or the selection of mutual fund share classes that pay higher fees and result in higher commissions to the investment advisors.  Investment advisors owe a fiduciary duty to their customers to act in their best interest, including disclosing conflicts of interest.  The SEC found that the investment advisory firms’ failures to adequately disclose that the advisors were actually incentivized to recommend funds with higher fees when the same mutual funds without those fees were available violated the firms and advisors’ fiduciary duty to their customers.

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