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.
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.