FINRA fines Merrill Lynch for millions for overseeing ITU sales


Merrill Lynch will pay more than $ 8 million in damages for failing to supervise registered representatives who recommended early open-ended investment trust (UIT) rollovers that could leave clients with higher selling costs, according to the Financial Sector Regulatory Agency.

In a letter, Merrill Lynch, Pierce, Fenner & Smith settled the charges with the regulatory agency over the alleged derisory surveillance practices that occurred between January 2011 and December 2015.

In addition to the orderly return, FINRA also fined the company $ 3.25 million, which has been a member of FINRA since 1937 and has around 30,500 registered representatives in more than 4,000 branches. Jessica Hopper, executive vice president and head of the enforcement department at FINRA, said in a statement that providing restitution to investors was a “top priority” for the agency.

“Customers often incur unnecessary costs when representatives recommend short-term sales of products that are intended to be long-term investments,” she said. “FINRA member companies must put in place sufficient monitoring systems to identify these potentially inappropriate transactions. “

An ITU is an SEC-registered investment company offering investors stocks or “units” in a portfolio of securities that are supposed to end on a fixed “maturity date”, typically 15 to 24 months. The portfolio is not intended to be actively managed during this period, and at the end of the period, ITU securities are sold with the profits accruing to investors.

But ITUs can have a variety of selling costs, including upfront and deferred costs, as well as “creation and development costs”. However, if the proceeds from a sale of ITU are used to purchase a new ITU, the trust sponsors often forgo the initial sales charge. But if a representative encouraged a customer to sell their ITU before the due date and then buy a separate ITU, it could lead to higher costs for the customer, according to the regulatory agency.

The structure, costs and long-term nature of ITUs made short-term trading “inappropriate,” according to FINRA. Merrill Lynch’s monitoring procedures also pointed out that ITUs worked best as long-term investments and deterred representatives from recommending short-term trades while requiring monitoring when representatives made such transactions for ” avoid unnecessary costs incurred by customers in fees and commissions, “according to FINRA. Additionally, a surveillance specialist from Merrill Lynch advised that 24-month and 15-month ITUs should be held for at least 15 months and one year, respectively.

The mind-boggling transactions resulted in significant sums for the company; During the period in question, Merrill Lynch executed approximately $ 32 billion in ITU transactions on more than 185,000 accounts, including $ 2.5 billion more than 100 days before the ITUs reached their due date. , according to the agency.

Despite concerns about short-term ITU transactions, FINRA said the company did not have a “reasonably designed” system in place to oversee early ITU renewals. While there have been automated reports identifying ITU sales made within seven months of their first publication, and even found representatives who made three or more ITU sales within four months of their purchase, none Report was only generated to report that a representative recommended an early rollover after seven months, but still below the trust’s maturity date.

“As such, the company failed to detect that on thousands of occasions during the relevant period, its representatives recommended potentially inappropriate series-to-series rollovers,” the letter read. FINRA. “The company failed to detect thousands of other occasions where its representatives have repeatedly recommended other potentially unsuitable early ITU renewals, even if not from series to series, forcing customers to pay unnecessary sales charges. “

In one case, a single representative from Merrill Lynch recommended around 75 early renewals of ITUs held primarily between 4.5 and 9 months without ever being flagged by an automated monitoring report. In total, clients paid more than $ 8.4 million in selling fees that they otherwise would not have paid had they kept the trusts until their due date. A spokesperson for Merrill Lynch said he had struck a deal to “resolve concerns” about the rollovers.

“We have addressed these concerns by improving our surveillance systems,” the spokesperson said.

Merrill Lynch has already “stepped up his controls” over ITU oversight, including new automated reporting and a ban on first series reversals, according to FINRA. In addition to the fine and restitution, the company agreed to censorship without admitting or denying the agency’s findings.

The agency had has already announced a review with a focus on ITU overturns, while a 2018 Regulatory and Review Priorities Letter said the agency would look into corporate oversight of ITU transactions. The agency fined Morgan Stanley $ 13 million following an investigation into its own oversight breaches over ITU sales, while in 2019, SEC fined Raymond James $ 15 million for similar issues. Last year, Stifel settled with FINRA over allegations of poor supervision of the ITU by accepting $ 3 million in fines and restitution.


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