Merrill fined for improper sales of mutual fund shares

WASHINGTON, DC – In its continuing investigation into mutual fund sales practices, the NASD announced in mid-December that it fined Merrill Lynch, Wells Fargo Investments and Linsco/Private Ledger Corporation a total of $19.4 million for suitability and supervisory violations relating primarily to sales of Class B mutual fund shares as well as some Class C mutual fund shares.

Merrill Lynch was fined $14 million, while Wells Fargo was fined $3 million and Linsco $2.4 million. The amount of the fines approximate the additional commissions the firms received by selling Class B shares rather than Class A mutual fund shares. In addition, each firm is implementing a remediation plan to compensate affected customers – collectively involving more than 29,000 households and nearly 140,000 transactions.

The investigation examined transactions during an 18-month period between January 2002 and July 2003. Investigators focused on 23,000 households at Merrill Lynch with 105,000 Class B and C share transactions; 4,500 households at Wells Fargo with 12,000 Class B and C share trades; and approximately 2,000 households with 22,400 Class B and C share trades at Linsco.

During this period, the three firms recommended and sold Class B and/or Class C share mutual funds to customers without considering or adequately disclosing on a consistent basis that an equal investment in Class A shares would generally have been more advantageous to those customers in view of all relevant considerations.

Before recommending a share class, brokers must consider the customer's anticipated holding period and all costs associated with each share class, including front-end sales charges, annual expenses and contingent deferred sales charges.

The firms also had inadequate supervisory and compliance procedures relating to the manner in which the firms' sales personnel recommended and sold Class B and Class C shares.

"In recommending mutual funds with different share classes, brokers must understand, consider and disclose information about which particular share class would be most beneficial for the customer from an expense perspective," said Barry Goldsmith, NASD executive vice-president and head of enforcement.