Merrill to Pay Investors $325,000, Concluding SEC’s Mutual Fund Self-Disclosure Plan
Merrill Lynch and a smaller advisory firm will reimburse investors more than $426,000 for selling mutual fund shares that paid brokers high-cost annual commissions when cheaper share classes were available, the Securities and Exchange Commission said Friday.
The cases are the final ones settled under a regulatory program that absolved firms of having to pay civil monetary penalties if they self-reported violations of mutual fund share-class sales and disclosure violations, the SEC said.
Ninety seven advisory firms returned more than $139 million to investors under the program, which the SEC initiated to reduce its litigation costs while addressing a long-term problem of controlling fees that erode investor returns.
The self-reporting program ended on September 30, 2019.
“We continue to actively pursue disclosure failures that financially benefit the adviser to the detriment of the client,” C. Dabney O’Riordan, cohead of the SEC’s asset management unit said in a prepared statement.
Merrill’s settlement related to mutual fund shares with 12b-1 fees that were sold between January 1, 2014, and May 31, 2018, the SEC said. The sales, and Merrill’s failure to adequately discuss advisors’ conflict-of-interest in recommending funds that paid them more, violated the Investment Advisers Act fiduciary and disclosure requirements, the SEC said.
Merrill settled without admitting or denying the findings, as is typical of many securities enforcement action settlements that save trial costs for the regulator while insulating firms from litigation by investors.
The SEC also accepted a settlement from Eagle Strategies LLC, a New York firm that self-reported fund-share sale and disclosure violations from January 2014 through March 2016, the regulator said Friday. Eagle, which was managing about $8.5 billion as of its July 2019 regulatory report, agreed to repay $101,090 to affected investors, the SEC said.
Cozad Asset Management, a Champaign, Illinois-based firm, agreed to a settlement of $416,870, including a $10,000 civil fine, the SEC said Friday.
Cozad, which managed about $1.18 billion of customer assets as of last May, reported its fund-class violations to the regulator just after the self-disclosure deadline. But the SEC said it considered the fact that Cozad reported its issues after realizing that an unaffiliated brokerage firm that sold its funds had participated in the self-disclosure initiative.
Merrill in 2014 reimbursed $89 million to customers and paid the Financial Industry Regulatory Authority an $8 million fine for failing to waive sales charges on Class A fund shares for eligible charities and retirement account customers.
The Bank of America-owned brokerage giant last week told brokers it will convert Class C fund shares after customers hold them for five years to shares with less expensive annual fees to comply with the SEC’s new Regulation Best Interest that becomes effective on June 30.
Class C shares carry no upfront sales charges, but their high annual commissions offset that advantage if held for long periods.
Merrill Lynch in 2018 hired Susan Axelrod, who ran Finra’s regulatory operations, as chief supervisory officer for its wealth management businesses.
In addition to requiring disgorgement, firms that participated in the self-disclosure program agreed to move existing clients to lower-cost share classes if available, to notify investors of their eligibility for reimbursement within 30 days of settlement and to correct relevant disclosure documents.