Merrill Lynch, Wells Fargo, Linsco Sanctioned for Mutual Fund Abuse
FINRA, formerly known as the NASD announced it has fined Merrill Lynch, Pierce, Fenner & Smith, Wells Fargo Investments and Linsco/Private Ledger Corporation a total of $19.4 million for suitability and supervisory violations relating primarily to sales of Class B mutual fund shares as well as some Class C mutual fund shares. These cases are part of a continuing investigation into mutual funds sales practices.
Enforcement actions were brought against these securities firms because they made recommendations to their customers to purchase Class B or, in some cases, Class C mutual fund shares without considering, on a regular basis, that an equal investment in Class A shares would have generally been more advantageous for certain customers. The firms did not consider that large investments in Class A shares of mutual funds entitle investors to breakpoint discounts on sales charges, generally beginning at the $50,000 investment level, which are not available for investments in Class B and Class C shares.
Merrill Lynch was fined $14 million; Wells Fargo was fined $3 million; and Linsco was fined $2.4 million. The amount of fines approximates the additional commissions firms received by selling Class B shares rather than Class A mutual fund shares. Additionally, each firm is tasked with putting into effect a remediation plan to compensate affected customers - totalling more than 29,000 households and nearly 140,000 transactions.
Barry Goldsmith, former NASD Executive Vice President and Head of Enforcement said that “in recommending mutual funds with different share classes, brokers must understand, consider and disclose information about which particular share class would be most beneficial for the customer from an expense perspective." Failure by firms to so results in their customers purchasing Class B and C shares when they should have been better served with Class A shares. The firms listed above have agreed to a remediation plan that will give affected customers the opportunity to convert their holdings to a more financially advantageous mutual fund share class.
The firms typically contact affected customers within five months and those customers will be given the opportunity to convert their Class B or Class C shares to Class A shares in a way that will restore the customers to the position they would have been in had they originally purchased Class A shares. Affected customers who have sold some or all of their Class B or Class C shares will be eligible to receive a cash payment in addition to, or instead of, receiving Class A shares.
FINRA had settled similar charges involving sales of Class B and C share mutual funds against Citigroup Global Markets, American Express Financial Advisors (now known as Ameriprise), and Chase Investment Services, and those settlements also involved remediation plans which those firms are currently implementing.