Merrill Violated Reg BI With $1.5M in Avoidable Fees: FINRA

What You Need to Know

Merrill offered fee waivers on certain new-issue products when purchased in advisory accounts.
Reps recommended clients buy the products in brokerage accounts, making them ineligible for waivers, and then move them to advisory accounts, FINRA says.
Merrill’s failures to spot or prevent this conduct violated Reg BI, according to the regulator.

The Financial Industry Regulatory Authority has censured Merrill Lynch and ordered the firm to pay $1.5 million in restitution for fees paid by clients with brokerage transactions that contained certain products eligible for advisory fee waivers, violating FINRA rules as well as the Securities and Exchange Commission’s Regulation Best Interest.

As a result of the firm’s supervisory failures, 1,361 clients holding over 2,000 accounts paid almost $1.5 million in avoidable fees, FINRA said.

According to FINRA’s order, from January 2018 through June 2022, in connection with brokerage transactions involving certain products eligible for advisory fee waivers, Merrill Lynch “failed to establish and maintain a supervisory system and written procedures reasonably designed to ensure that its registered representatives had a reasonable basis to believe their recommendations were suitable or in each customer’s best interest.”

Merrill Lynch, a unit of Bank of America Corp. based in New York, has more than 28,000 registered representatives in more than 4,000 branch offices, servicing tens of millions of clients.

Merrill Lynch offers clients a 12-month waiver of otherwise applicable advisory fees on certain new-issue products if the products are purchased initially in an advisory account, FINRA’s order explains.

Notwithstanding this benefit, from January 2018 to June 2022, in certain instances Merrill’s registered reps “recommended that customers purchase such products in a brokerage account and then promptly recommended the transfer of those same products to an advisory account,” the order states.

The brokerage recommendations “caused customers to incur unnecessary expenses — in particular, in the form of advisory fees that would have been avoided if the assets were purchased initially in advisory accounts,” the order states.

Merrill failed to monitor for, detect or prevent these types of recommendations, which were potentially unsuitable or not in the clients’ best interest.