On June 4, 2020, the Financial Industry Regulatory Authority (“FINRA”) announced that it ordered Merrill Lynch, Pierce, Fenner & Smith Inc. to pay its customers more than $7.2 million in restitution and interest resulting from unnecessary sales charges and excess fees incurred by more than 13,000 Merrill Lynch accounts in connection with mutual fund transactions from 2011 to 2017. FINRA found that Merrill Lynch’s ’s supervisory systems and procedures failed to ensure that certain customers received sales charge waivers and fee rebates that were available to them.
Typically, mutual fund issuers will offer their customers a right of reinstatement, allowing the investors to purchase shares of a mutual fund after previously selling shares of that fund or another fund in the same fund family, without incurring a front-end sales charge, or allowing the investors to recoup some to all of contingent deferred sales charges.
Rather than ensuring that proper supervisory systems and procedures were in place to identify waivers and fee rebates that were available through rights of reinstatement, Merrill Lynch instead relied on its brokers and investment advisors to manually recognize and apply waivers and rebates for investors and for the financial advisors to manually identify which customers are eligible for reinstatement rights. According to FINRA, the manual system was “unreasonably designed… given the number of customers involved, the complexity of determining which customers were due sales charge waivers or fee rebates, and difficulty in calculating the amount of the waiver and rebate.”