FINRA fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $5 million for what it deems were "negligent disclosure failures" related to the firm's sales of five-year senior debt notes. Regulators charged Merrill Lynch with failing to adequately disclose certain costs so as to make it appear that fixed costs associated with strategic return notes were lower than they actually were. FINRA specifically accused the firm of misleading customers by failing to mention at least one expense category entirely in its marketing materials.
Industry statistics indicate that Merrill Lynch sold $168 million worth of the relevant notes to retail customers, and investigators say the firm promoted them as a hedge against potential downturns in the equities market.
FINRA says Merrill Lynch's disclosure failures concerned the "execution factor" of the S&P 500 Index and that the firm failed to adequately disclose this execution factor in offering documents or sales material, instead emphasizing that customers would be subject to a two-percent sales commission and 0.75% annual fee in connection with the notes, effectively making the investment seem to have fairly low fixed costs, resulting in FINRA's determination that Merrill Lynch's conduct was materially misleading to customers.
The "execution factor" is an Index feature designed to replicate transaction costs incurred in simulating buying/selling of various Index options. The transaction costs are accrued daily and historically totaled about 1.5% each quarter. FINRA concluded that in buying the notes, a "reasonable retail customer would have considered it important that the execution factor imposed these costs."
By not having the execution factor information readily available through adequate disclosure, investigators say that Merrill Lynch's investors were materially mislead about the true costs of buying and selling strategic return notes through the firm.
If you have invested with Merrill Lynch or with any broker, financial adviser or firm whose failure to adequately disclose costs and fees or similar material facts has proven harmful to your investments or interests due to incurring unexpected costs and greater expenses than were previously advertised or stated, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.