Finra Bars Broker for Gaming Merrill’s Mutual Fund Share Order System
In an enforcement action illustrating regulators’ continuing concerns over the suitability of mutual fund share classes that brokers sell, a life-long Merrill Lynch broker has accepted a permanent bar from the industry for violating the firm’s limits on “B” share sales.
Bhenoy “Ben” Dembla avoided household account restrictions on fund family B shares by entering fictitious sell orders a few minutes before buying additional shares for clients, according to a letter of acceptance, waiver and consent that the Financial Industry Regulatory Authority posted on Tuesday.
Merrill, along with many other brokerage firms, program their electronic order systems to prevent purchases that would breach client accumulation limits. B shares charge no upfront loads, but pay brokers and firms ongoing 12b-1 fees, and can have higher sales charges than other fund share classes.
Dembla, who worked at a Merrill Chicago office from the start of his career in March 2001 until his August 2016 termination without accumulating any customer or regulatory complaints, entered and canceled 41 fictitious sell orders between December 2015 and April 2016 to make room for additional sales, according to the consent order.
He also made false entries as to clients’ reasons for the sales into Merrill’s databases, it said.
Nicholas Iavarone, Dembla’s lawyer, said his client executed the false orders in the short time period because he was “overmedicated on prescribed pain killers.” Dembla was on sick leave, and in rehab, when he was dismissed by Merrill, and had no expectations of working again in the securities industry, the lawyer said.
Finra charged Dembla with violating its Rule 2010 business conduct order by circumventing Merrill’s restrictions and making the false entries. Merrill’s written policies prohibit orders to buy Class B shares in a fund family if a client’s holdings exceed $100,000, according to the consent letter. The prospectuses for funds that Dembla sold discussed similar limitations on ownership of a fund’s B shares by a single household, it said.
Finra did not bring unsuitability or other customer-care violation charges—nor impose monetary sanctions—despite customer complaints of unsuitable investment recommendations that Merrill added to Dembla’s regulatory records months after his termination.
“We did not know about customer complaints until Finra told us,” Iavarone said.
Merrill, which paid customers who were sold excess B shares $31,801 in restitution, settled the three unsuitability complaints for $372,000, according to Dembla’s BrokerCheck record. One customer had sought $790,925 in damages.
Dembla has an ongoing wrongful termination arbitration complaint against Merrill, and is seeking about $8 million in damages, Iavarone said. The firm turned down the broker’s attempt to arrange a sale of his book to a team in Michigan, and the damage estimate reflects what he could have received over the life of the transition contract, the lawyer said.
A Merrill spokesman said the firm does not comment on ongoing litigation or arbitration.
Finra has been prosecuting mutual fund class-share suitability sale violations for more than a decade, and the SEC last year offered “favorable” settlement terms to firms that self-reported conflicts of interest in selling certain share classes in advisory accounts.