Merrill Lynch, Pierce, Fenner & Smith Incorporated has agreed to pay a $175,000 fine and accept a censure as part of a settlement with the Financial Industry Regulatory Authority (FINRA) related to disclosure failures on municipal securities transactions.
According to the settlement, between January 2021 and September 2023, Merrill Lynch did not disclose non-de minimis market discounts to customers in 4,181 purchases of municipal securities. These transactions had a total principal value of approximately $87 million and involved 1,072 self-directed customer accounts.
FINRA found that the firm failed to provide required disclosures to self-directed customers, at or prior to the time of trade, regarding municipal securities that traded at a market discount. Specifically, Merrill Lynch did not inform affected customers that all or a portion of the investment return represented by accretion of the market discount might be taxable as ordinary income.
The settlement states that, during the relevant period, Merrill Lynch did not establish and maintain a supervisory system, including written procedures, reasonably designed to ensure compliance with its obligation to provide these market discount disclosures. The firm's written procedures did not address the obligation to provide time-of-trade disclosures about market discounts to customers using its self-directed platform. In addition, the firm lacked any process to determine whether all material information regarding market discounts was provided to self-directed customers at or before the time of trade.
Remedial Actions and Rule Violations
After identifying the issue, Merrill Lynch provided market discount disclosures to the impacted self-directed customers. The firm also offered to compensate customers who demonstrated that they incurred tax liability above the capital gains rate as a result of purchasing the municipal securities in question.
In September 2023, Merrill Lynch updated its written procedures concerning market discount disclosures for its self-directed platform. The firm also added a market discount disclosure for applicable transactions executed through that platform.
FINRA determined that Merrill Lynch violated Municipal Securities Rulemaking Board (MSRB) Rules G-47 and G-27. Rule G-47 relates to time-of-trade disclosures for municipal securities, while Rule G-27 addresses supervision requirements. As part of the settlement, the firm consented to the $175,000 fine and a censure, without additional details on further sanctions in the source information.
