Brokerage firm Merrill Lynch, Pierce, Fenner & Smith Inc. has agreed to pay $2.8 million to settle charges by the Financial Industry Regulatory Authority (FINRA) that the firm’s failure to supervise led to over-billing.
From April 2003 to December 2011, Merrill Lynch charged a total of about $32 million in unwarranted fees to roughly 95,000 customer accounts as a result of supervisory failures. The firm has since returned the fees with interest, according to an announcement from FINRA.
Merrill Lynch also consented to be censured as part of a Letter of Acceptance, Waiver and Consent (AWC) the firm submitted in late May to settle the charges. The firm neither admitting nor denied FINRA’s findings and FINRA accepted the AWC on June 21.
A Delaware corporation with its principal place of business in New York, Merrill Lynch is a global firm provides retail brokerage, corporate and investment banking services, among other things. It employs more than 15,000 brokers and handles roughly $2.2 trillion in customer assets.
Registered as broker-dealer and investment adviser with the Securities and Exchange Commission (SEC), the firm has been regulated by FINRA or its predecessors since 1937. For a complete disciplinary history, see FINRA public disclosure records.
According to the Letter of Acceptance, Waiver and Consent
A number of customers in investment advisory programs were not billed as indicated in their contract and disclosure documents. Faulty supervisory systems involving the coding for the investment programs caused the over-billing.
Between 2004 and 2011, as a result of improperly coded data, Merrill Lynch charge fees on ineligible securities to customers of its International Asset Power program. Most of these securities were affiliated with the firm, the AWC said. Roughly 14,500 customers in this program were overcharged about $9.5 million.
Merrill Lynch also over-billed customers holding 100 percent fixed-income securities. While working to remedy the situation with the International Asset Power program, the firm discovered that its billing system did not properly identify fixed-income accounts, which are subject to a lower fee schedule. Between January 2004 and December 2011, Merrill Lynch overcharged roughly 7,000 customers almost $7 million.
Other Instances of Overcharging Detailed in the AWC
- Allowing flat-rate billing to exceed the maximum tiered-fee rates contrary to statements in customer disclosures. From April 2003 to June 2010, Merrill Lynch overcharged 2,000 customers almost $3.5 million.
- Improperly programming systems so customers did not receive the rebates on fees for fund transactions to which they were entitled. From January 2008 to December 2009, Merrill Lynch failed to rebate about $2 million in fees to roughly 36,000 customer accounts.
- Faulty value aggregation in some program accounts that resulted in customers failing to receive appropriate fee discount when their assets reached the specified threshold. From October 2006 to December 2011, Merrill Lynch overcharged about 26,000 customer accounts excess fees totaling a little more than $8 million.
- Flat rates erroneously applied to existing accounts that resulted in almost 500 customers accounts being overcharged a total of about $600,000 from December 2009 to July 2010
- Customers in the Mutual Fund Advisor program incorrectly charged under a new, higher fee schedule between October 2007 and December 2007, though they opened their accounts under the old, lower-fee schedule. Almost 1,000 customer accounts were affected, resulting in total over billing of about 1.1 million.
- Charging about $700,000 in wire transfer fees to roughly 8,000 customer accounts between October 2007 and September 2011, even though the charges had not been adequately disclosed.
In addition, because of incorrect system coding between July 2006 and April 2008, Merrill Lynch failed to send trade confirmations for almost 2 million transactions involving $5.3 billion in assets. From late 2008 to late 2010, almost 8.7 million transactions were missing trade confirmations because the coding systems were incorrect. In total, Merrill Lynch failed to send almost 11 million trade confirmations affecting more than 200,000 customer accounts.
The firm also “neglected to state — or inaccurately stated — whether it acted as an agent or a principal on trade confirmations and account statements for roughly 7.5 million mutual fund transactions”, the AWC said.
Between 2007 and 2010, Merrill Lynch failed to deliver the proxy materials for almost 9,000 accounts, the AWC said. The firm did not have an adequate supervisory system in place to detect this failure to deliver proxies, some of which were supposed to be sent directly, and some through third-party vendors.
Finally, for more than eight years beginning in 2001, Merrill Lynch failed to send margin risk disclosure statements to about 7,000 customers with Cash Management and Working Capital Management accounts, the AWC said. The firm also failed to send business continuity plans to roughly 17,000 of these customers between August 2004 and June 2010.
“Through the above misconduct the firms violated various FINRA rules and federal securities laws”, the AWC said.
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