FINRA Fines Merrill Lynch and UBS for Supervisory Failures

The Financial Industry Regulatory Authority (FINRA) recently announced that it has fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $150,000 and UBS Financial Services, Inc. $100,000 for supervisory failures that led to unsuitable short-term sales of closed-end funds (or CEF’s) purchased at the funds’ initial public offerings.

FINRA also suspended five Merrill Lynch brokers each for 15 days and fined them $10,000 for making unsuitable CEF recommendations to customers. FINRA’s investigation into the activities of former UBS brokers involved in the short-term sales of CEFs continues.

Closed-end funds possess complex features that can give rise to unsuitability for short-term investors that need liquidity (particularly when these investments are purchased at the initial public offering as was apparently the case in these cases. According to the FINRA announcement, neither Merrill Lynch nor UBS had adequate supervisory systems and procedures to prevent brokers from engaging in unsuitable short-term sales of newly issued closed-end funds.

Closed-end funds are investment companies that sell a fixed number of shares in an initial public offering (IPO), subject to built-in sales charges. After the offering, the shares trade in the secondary market, typically at a discount from the initial offering price. Often times, the closed-end funds have a sales charge between 4-5%, which was likely the financial advisors motivation in selling the CEF’s in these cases. Closed-end funds also often have a “penalty bid period” of generally 30 to 90 days immediately following the IPO making the investments particularly unsuitable for short term investors, or investors that need liquidity.

According to the FINRA announcement regarding their investigation into the Merrill Lynch and UBS brokers, and the supervisory problems at these firms related to closed-end funds, the regulatory concern FINRA has related to CEFs is the potential for brokers to earn high fees at their customers’ expense by soliciting their customers to purchase CEFs at the IPO and then later, after the expiration of the penalty bid period, recommend that customers sell the CEFs, often at a loss, using the proceeds to purchase yet another CEF at an initial offering.

FINRA found that despite being aware that CEFs purchased at the IPO are more suitable for long-term investments – and that the sales charges applied to purchases at the IPO make short-term trading of these CEFs generally unsuitable – Merrill Lynch and UBS did not have adequate supervisory systems and procedures designed to detect and prevent unsuitable short-term trading of CEFs.

The five Merrill Lynch brokers sanctioned by FINRA for recommending the unsuitable short-term sales of closed-end funds s are:

• Kenneth C. Iwelumo of the Newark, NJ, branch, who has been registered with Merrill Lynch since 1986. Iwelumo’s customers suffered losses totaling approximately $563,000.
• Ronald Kemp of the Denver, CO, branch, who has been registered with Merrill Lynch since 1997. Kemp’s customers suffered losses totaling approximately $411,000.
• Joseph Miller of the Springfield, MA, branch, who has been registered with Merrill Lynch since 1995. Miller’s customers suffered losses totaling approximately $130,000.
• John Ong of the New York City branch, who has been registered with Merrill Lynch since 1994. Ong’s customers’ suffered losses totaling approximately $350,000.
• Michael Kizman of the Schaumburg, IL, branch, who has been registered with Merrill Lynch since 1992. Kizman’s customers suffered losses totaling approximately $221,000.
In settling these matters, Merrill Lynch, UBS and the Merrill brokers neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

If you have questions about a closed-end fund you purchased, or if you believe that you have been the victim of a securities fraud, The White Law Group may be able to help. To speak to a securities attorney, please call our Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

To learn more about The White Law Group, visit https://whitesecuritieslaw.com.