Merrill Lynch settles FINRA case over ITU sales for $ 11.7 million
The latest FINRA case took almost a decade to resolve.
Almost five years after the regulator launched targeted reviews of sales by wealth managers of expensive alternative investment products called unit funds, Merrill Lynch OK to pay $ 11.7 million to settle a case involving allegedly inappropriate ITU renewals between 2011 and 2015. During that four-year period, the Bank of America’s wealth manager sold $ 32 billion of ITU has more than 185,000 customer accounts, according to FINRA.
About $ 2.5 billion in sales – or 8% of the total – came from ITUs purchased in part or entirely as rollovers from other ITUs that Merrill Lynch brokers sold more than 100 days before their due date. deadline, according to FINRA investigators. According to FINRA, approximately 3,000 accounts receivable paid $ 8.4 million in combined selling charges that they would not have incurred had they held the ITUs to maturity.
ITUs offer a fixed portfolio that ends at a specified period after issuance – typically one year or between 15 and 24 months. In September 2016, FINRA issued a targeted review letter, a four-part request asking members for information on ITU’s first renewals, which it defined as selling an ITU at least 100 days before the portfolio end date.
“Customers often incur unnecessary costs when representatives recommend short-term sales of products that are intended to be long-term investments,” Jessica Hopper, FINRA’s chief enforcement officer, said in a statement. “FINRA member companies must put in place sufficient monitoring systems to identify these potentially inappropriate transactions. “
In settling the case on June 25 without admitting or denying accusations of improper sales and failure to supervise his force of more than 30,000 registered representatives in 4,200 offices, Merrill Lynch agreed to pay a fine of 3.25 million dollars on top of restitution plus interest. .
“We have reached an agreement to resolve concerns about early renewals of certain unit investment trusts between 2011 and 2015,” Bank of America spokeswoman Alliccia Hernandez said in an emailed statement. “We have addressed these concerns by improving our surveillance system. “
Despite extensive regulatory review of alternative products in general, and UITs in particular, the products remain popular with wealth managers due to issuer payments and other incentives for brokers and businesses such as concessionaires to sell them, according to Teresa Verges, director of the Investor Rights Clinic at the University of Miami Law School. The products also typically carry a “significant fee” of around 3.75%, Verges said in an email.
“We have dealt with numerous cases of clients placed in ITUs who were either too risky for their profile or investment objectives, or, as in the present case against Merrill Lynch, subjected to ITU switching activity,” Verges said.
“The ‘change of funds’ – from an upfront mutual fund to an ITU – is a form of excessive trading that burns an investor’s capital through excess fees,” Verges continued. Like the old-fashioned churning cases, this strategy only enriches the company and the broker. FINRA’s action against Merrill should send a strong message to companies that this activity is inherently inappropriate and violates obligations. brokers to their clients.
From January 2011 to December 2015, Merrill Lynch reported only the first UIT reversals that occurred in the seven months after the initial product offering period, according to FINRA. As a result, the company failed to detect thousands of potentially inappropriate early renewals in the same ITUs and thousands more potentially inappropriate renewals, according to FINRA. A representative recommended 75 first UIT reversals and the company’s automated systems reported none, according to the regulator.
This isn’t the first time the wirehouse has paid a settlement related to the ITU change, and it’s not the only one among asset managers to make substantial payments after FINRA’s investigations into ITU renewals.
In August 2012, Merrill Lynch OK to pay a fine and restitution of $ 530,000 after the regulator alleged that a former broker recommended 37 inappropriate short-term and closed-fund ITU trades, many of which involved switches between products. A year ago, FINRA commissioned SagePoint Financial from Advisor Group pay $ 1.6 million in the settlement of a case also involving early renewals of the ITU.
On the same day it announced Merrill Lynch’s most recent settlement, FINRA issued an ‘Investor Notice’ bulletin on ITUs.
“If you plan to keep an ITU until termination, be sure to note any special conditions for early termination in the trust’s prospectus,” the regulator said. “And finally, if your licensed financial professional recommends that you transfer an ITU position to a new ITU before the due date, be sure to ask if this will incur any increased selling costs, immediately or over time. time.”