Compliance August 18, 2010

Merrill Lynch Fined for UIT Discount Failures

The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch $500,000 for failing to provide sales charge discounts to customers of eligible purchases of Unit Investment Trusts (UITs).
Reported by

A press release said FINRA also charged Merrill Lynch for lacking an adequate supervisory system to monitor appropriate sales and discounts. The firm agreed to provide remediation of more than $2 million to affected customers.

Unit Investment Trusts offer redeemable units of generally fixed portfolio of securities that terminate on a specific date. The announcement explained that UIT sponsors often offer “breakpoint” and “rollover and exchange” discounts to investors. A breakpoint discount is defined as a reduced sales charge based on the total price of the purchase, giving greater discounts for higher costs. A rollover or exchange discount is a reduced sales charge that is offered to investors who use the termination or redemption proceeds from one UIT to purchase another UIT.  

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In March of 2004, FINRA issued a Regulatory Notice to remind firms that they should develop and implement procedures to ensure their customers pay only appropriate costs for UITs. Merrill Lynch’s written supervisory procedures prior to May 2008 had little to no information regarding UIT sales charge discounts, and have since offered inaccurate and even conflicting guidance, according to the press release. Without substantive guidelines or policies established, between October 2006 and June 2008 the firm failed to apply appropriate discounts to their customers’ UIT purchases.  

Merrill Lynch also approved for distribution, and for use in client presentations, inaccurate and misleading UIT sales literature, FINRA said. The presentation discussed sales charge discounts, but led clients to believe that they were only entitled to a discount if they used UIT proceeds to purchase a new UIT offered by the same sponsor. 

As part of the settlement, Merrill Lynch is providing restitution to all customers who were overcharged when purchasing UITs through the firm, from January 2006 to the present. Merrill Lynch settled this matter without admitting or denying the allegations, but consented to the entry of FINRA’s findings. 

Investors can find more information about FINRA-registered brokers and firms at www.finra.org/brokercheck.  

 

Products August 18, 2010

Vanguard Launches 2055 Target-Date Offering

The Vanguard Group has unveiled the Vanguard Target Retirement 2055 Fund, for investors 18 to 22 years old. 

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A Vanguard news release said the fund’s initial allocation is approximately 90% stocks and 10% bonds.

The new offering will invest in Vanguard index funds and provide exposure to U.S. stocks and bonds, as well as developed and emerging market international stocks. The fund’s underlying funds invest in about 6,000-plus U.S. stocks and bonds and 2,000-plus international stocks, according to the company.

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The fund will gradually shift to bonds over time to an expected allocation of 50% stocks/50% bonds on reaching its target date and will reach an expected final allocation of 30% stocks/70% bonds seven years after the target date.

“Over the past few years, the stock market has dropped 57%, rallied 86%, and subsequently declined 8%, leading to the potential for an entire generation to become wary of investing,” said Vanguard Chairman and CEO Bill McNabb, in the news release.  “We must encourage younger investors to participate in the financial markets at an early age, save at aggressive levels, keep an eye on investment costs, and maintain a long-term focus.”

The expense ratio of the 2055 fund is expected to be 0.19%, Vanguard said. More information is at www.vanguard.com.

 

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