Seems like just days ago I blogged about Jessica Hopper and her commitment to providing restitution to customers. Since I posted that blog, there were two other settlements (which I added to that blog as updates) in which FINRA again seemed to prioritize restitution over the imposition of a fine. Yesterday, however, FINRA announced a blockbuster settlement with Merrill Lynch that should serve to eliminate any doubt that anyone may still have about Ms. Hopper’s priorities.
In an AWC, Merrill agreed that for a six-year period commencing in April 2011, the firm “failed to provide over 13,000 accounts with mutual fund sales charge waivers and fee rebates to which the customers were through rights of reinstatement offered by mutual fund companies.” Turns out that instead of having a written supervisory procedure that ensured investors got the benefit of their rights of reinstatement, Merrill “relied on its registered representatives to manually to identify and apply such waivers and rebates.” That didn’t work out too well, it seems, as those Merrill RRs missed 13,328 accounts that were entitled to a right of reinstatement, causing those accounts to pay about $6 million in excess sales charges and fees. As a result, Merrill was found to have violated the supervisory rule.
As a sanction for this rule violation, Merrill was censured, required to pay restitution to the affected customers, plus interest, totaling over $7.2 million. But…there was no fine imposed. Zero. Nada. Bupkis. Why? It appears that there were a couple of reasons, but principally it was because of what FINRA characterized as Merrill’s “credit for extraordinary cooperation.” More on that in a second.
But, first, let’s acknowledge, for, like, the fourth time in a week, that FINRA placed the emphasis of the sanctions on the restitution component. Again, all you’ve got to do is read the press release announcing the AWC. Jessica Hopper is once again quoted, this time saying, “We are pleased that Merrill has reimbursed the customers affected by its failure to provide these waivers. Ensuring that harmed customers receive restitution is our highest priority and we will take a firm’s determination to proactively provide restitution into account when assessing sanctions.” As I said recently, the evidence is indisputable that Jessica means what she says about her priorities.
Ok, let’s circle back to the cooperation credit, and start with the snarky observations. Sure, Merrill got that credit, but the AWC recites that “[t]his matter arose from a routine cycle exam by FINRA’s Department of Member Supervision, and the firm subsequently investigated the matter further.” Hmmm. I read Reg Notice 19-23, and it plainly states that the first type of extraordinary cooperation is “self-reporting before regulators are aware of the issue.” It also states that “FINRA also will consider whether the firm proactively detected the misconduct through compliance, audits or other surveillance, as opposed to identifying the misconduct only after receiving notice from customers, counterparties or regulators.” Based on the scant recitation of the facts in the AWC, it sure seems that it was FINRA brought this matter to Merrill’s attention during a routine exam.
This would seem pretty odd, except for the fact that, hey, THIS IS MERRILL LYNCH! You think Merrill gets treated the same as everyone else? Consider the “Relevant Disciplinary History” portion of the AWC: it recites all of one prior regulatory matter. But, BrokerCheck reveals that Merrill has 1,447 disclosures, 589 of which are regulatory events. I haven’t bothered reviewing them all, but the simple fact is that Merrill has lots of prior supervisory violations. For FINRA to agree to recite in this AWC that only one prior matter is “relevant” here is galling, given that small firms are never according similar deference. Bill Singer, who authors an incredible blog, wrote about this very subject just last month, and I agree with his outrage. If you don’t already subscribe to his blog, you must.
With that off my chest, let’s just take a quick look at what Merrill did to get the credit:
- It engaged a consultant “to conduct a complex analysis” to identify the affected customers and compute the amount of money they overpaid;
- It “promptly” came up with a plan of remediation, which included notifying the customers and, more importantly, paying them restitution (plus interest);
- It fixed the deficiency in the supervisory procedures; and
- It provided “substantial assistance” to the FINRA examiners.
Well, there you go, there is the current blueprint to avoid the payment of fines, and, perhaps, also to qualify for credit for extraordinary cooperation. You know the plan; now go execute it. But, as I said in the title to this post: the key is the restitution. Pay that, pay it voluntarily, pay it promptly, and it will clearly impact the disposition of your exam.
 2011!! By my math, that was nine years ago! Is there no limit to how far back FINRA will deign to examine?
 According to the AWC, a “right of reinstatement” “allows investors to purchase shares of a fund after previously selling shares of that fund or another fund in the same fund family, without incurring a front-end sales charge . . . or to recoup all or part of a contingent deferred sales charge fee.”
 Indeed, the AWC provides that Merrill had paid the restitution before the AWC was even approved.