Merrill Lynch Hit With $325,000 Fine After Self-Reporting Bad Advice

The Securities and Exchange Commission settled charges Friday against Merrill Lynch and two other firms who self-reported violations under the commission’s Share Class Selection Disclosure Initiative.

Eagle Strategies and Cozad Asset Management joined Merrill Lynch with self-reported violations related to disclosing conflicts of interest in the selection of mutual fund share classes, according to a news release from the SEC.

They represent the final cases under the self-reporting initiative announced Feb. 12, 2018, the release said. Including last week’s actions, the SEC said it has ordered more than $139 million to be returned to investors as part of the initiative.

The voluntary initiative allowed advisers an opportunity to self-report that they had failed to “fully and fairly disclose their conflicts of interests” in selecting for their advisory clients more expensive mutual fund share classes that paid 12b-1 fees when lower-cost share classes were available.

Self-reporting made advisors eligible for standard settlement terms that did not include the imposition of a civil penalty.

From March 11, 2019 through September 30, 2019, the SEC issued orders against 95 advisers that chose to participate in the initiative.

“This incredibly successful initiative led to the return of almost $140 million to harmed investors, stopped wrongful conduct, and highlighted the importance of an adviser’s obligations to provide full and fair disclosures to clients,” said C. Dabney O’Riordan, co-chief of the Asset Management Unit. “We continue to actively pursue disclosure failures that financially benefit the adviser to the detriment of the client.”

The SEC’s orders find that Merrill Lynch, Pierce, Fenner & Smith Incorporated and Eagle Strategies violated Section 206(2) of the Investment Advisers Act of 1940, and ordered that they are censured, that they cease and desist from future violations, that they pay disgorgement and prejudgment interest totaling over $425,000 and that they comply with certain undertakings, including returning the money to investors.

Improper Fees

Merrill Lynch, Pierce, Fenner & Smith self-reported violations between Jan. 1, 2014 and May 31, 2018. The firm agreed its advisors accepted 12b-1 fees they were not entitled to received had they acted with proper fiduciary duty. Merrill agreed to pay disgorgement of $297,394 and prejudgment interest of $27,982.

Eagle Strategies self-reported violations between Jan. 1, 2014 and March 30, 2016, and agreed to pay disgorgement of $89,977.57 and prejudgment interest of $11,112.89.

The SEC also charged Cozad Asset Management Inc., which self-reported its share class selection violations to the SEC in the months following the initiative deadline. The SEC found that Cozad failed to fully disclose the conflicts arising from its and its associated persons’ selection of more expensive mutual fund share classes for clients when lower-cost share classes for the same fund were available.

The SEC’s order finds that Cozad violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and ordered that it is censured, that it cease-and-desist from future violations, that it pay disgorgement and prejudgment interest totaling over $400,000, as well as a $10,000 civil penalty, and that it comply with certain undertakings, including returning the money to investors.

Since September 2019, the commission has issued orders against two firms that were eligible to self report pursuant to the initiative, but failed to do so: Mid Atlantic Financial Management Inc. (ordered to pay $1,027,002 in disgorgement and prejudgment interest and a $300,000 civil penalty) and BPU Investment Management Inc. (ordered to pay $692,107 in disgorgement and prejudgment interest and a $235,000 civil penalty).

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.

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