Merrill Lynch, UBS slapped for unsuitable sales of closed-end funds -- a $5 million pay-out to customers and fines for supervisory failures.
Business is good these days for the Financial Industry Regulatory Authority (FINRA). In yet another slap on the hand for unsuitability -- similar perhaps to the Auction Rate Securities debacle -- FINRA announced earlier this week that it has fined Merrill Lynch and UBS concerning closed-end funds (CEF's) sales.
What went wrong for customers? Poorly supervised brokers sold closed-end funds at the initial public offering (IPO) as short-term sales, when in fact these funds are more suitable as long-term investments.
This was a sweet deal for brokers until it all came to light and now five at Merrill Lynch were suspended for 15 days and fined $10,000 each. FINRA continues its investigation of UBS brokers with regard to these sales.
In the CEF's at issue, brokers made substantial commissions of 4.5 per cent and after the expiration of a 30-90 day penalty bid period, would recommend to investors that the CEF shares be sold, often at a loss, only to recommend another purchase of CEF at the initial offering. Internally, neither Merrill Lynch nor UBS had appropriate procedures in place to detect this practice or to warn investors of the potential risks involved in the CEF short-term sales.
FINRA fined Merrill Lynch $150,000 and UBS $100,000 for this practice and the failure to adequately supervise and safeguard against it. In imposing these fines, FINRA took into account the remediation efforts of these companies, which included over $3 million to customers by Merrill Lynch and over $2 million to customers by UBS.
Prior to the FINRA investigation, both companies had hired outside counsel to conduct internal investigations into CEF practices and had sanctioned a number of brokers involved. Both companies' remediation efforts prior to the FINRA investigation included payments to customers. This was considered in the imposition of the fines for the CEF practices.
FINRA announced that in settling these particular matters, neither company admitted or denied the charges, but did consent to entry of the FINRA findings.
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