Merrill Lynch Pierce Fenner Smith Incorporated a securities broker dealer headquartered in New York New York has been censured and fined $3,250,000.00 by Financial Industry Regulatory Authority (FINRA) based upon findings that Merrill Lynch failed to supervise its stockbrokers’ recommendations of unit investment trusts resulting in customers being overcharged on UIT transactions. Letter of Acceptance Waiver and Consent No. 2017053437701 (June 25, 2021).
According to the AWC, $2,500,000,000.00 in unit investment trust transactions were executed through Merrill Lynch where customers’ positions were sold prematurely and proceeds were used for purchases of new unit investment trusts. The AWC identified $389,000,000.00 in UIT transactions where there was a premature surrender of the customer’s existing UIT and a purchase of a new UIT in that series.
The AWC stated that Merrill Lynch contained suitability policies on unit investment trusts. The securities broker dealer specified in its policies that UITs were long-term investments and that there was no place for stockbrokers to recommend short-term trades of UITs out of concerns for bad sales practices. Merrill Lynch indicated that 24-month unit investment trusts should probably not be liquidated before 15 months, and that 15-month products should probably not be liquidated before a year. There were no series-to-series rollovers supposed to be solicited by stockbrokers according to Merrill Lynch’s guidance.
The securities broker dealer failed to create an adequate supervision system that was capable of identifying problematic unit investment trust rollovers. There were automated reports used by the securities broker dealer in which UIT transactions were flagged if customers sold their positions within seven months of the investments being issued. But there was no report used by Merrill Lynch which showed if a stockbroker recommended a rollover following that seven-month period. There were no reports that identified patterns of stockbrokers recommending premature UIT rollovers either.
On thousands of occasions, unsuitable recommendations were potentially made by Merrill Lynch stockbrokers pertaining to series-to-series rollovers. Merrill Lynch did not identify thousands of occasions where its stockbrokers advised customers to enter into possibly unsuitable rollovers.
In one case, 75 early unit investment trust rollovers had been recommended by a Merrill Lynch stockbroker. Most of the rollovers involved UITs that customers held for approximately four-to-nine months. No reports detected this stockbroker’s activity.
Merrill Lynch caused $8,437,223.38 in sales charges to be paid by customers who would not have incurred those charges had they kept their existing unit investment trusts until they matured. The securities broker dealer violated FINRA Rules 2010 and 3110 and National Association of Securities Dealers (NASD) Rule 3010.
This is not the first time that Merrill Lynch has been censured for unit investment trusts. The firm was previously censured by FINRA for failing to supervise UIT transactions and for failing to supervise a stockbroker who made unsuitable recommendations to customers concerning short-term UIT trades.
