At the start of this month, FINRA ordered Merrill Lynch to return nearly $1.5 million to its customers. FINRA determined that Merrill reps recommended that customers purchase products in brokerage accounts rather than advisory accounts, when the latter were eligible for fee waivers. 2000 accounts were affected, and Merrill had to pay restitution of $1,486,380, as well as interest, to 1,361 different customers.
FINRA said Merrill failed to set up a supervisory system to ensure that its reps could determine suitability when making investment recommendations and thus were unable to determine whether such recommendations were in their customer’s best interest. Running a fowl, during the time frame at issue, of both FINRA’s Rule 2111 on suitability and then Reg BI regarding a customer’s best interest.
This situation is instructive for the BD side of the business as well as for advisers and registered private funds. As fiduciaries, we know all about our obligations to our clients; that their interests come first, and that suitability is always front and center when considering what is in their best interest.
But the finer lesson to learn from this scenario, has to do specifically with FINRA’s finding that Merrill failed to set up a supervisory system to ensure that its reps could determine suitability when making investment recommendations and thus were unable to determine whether such recommendations were in their customer’s best interest.
The result was the firm running afoul of the regs and clients being harmed, the cause was Merrill’s failure to set up a system that could effectively allow reps to uphold their obligations … and for Merrill to check that they were doing so.
This is the gem.
All of us who have enjoyed numerous regulatory exams can attest that we strive to properly administer the rules and regs and that we often go out of our way to make sure our policies and procedures are implemented, completed timely and recorded. But when we review our compliance programs and the infrastructure, we have designed to support it, in general, perhaps with an eye to our annual 206(4)7 report, it is always smart to check on the checks.
What does that mean?
If we say we assess suitability for our clients, how do we do that and how do we record having checked? If we say we say we conduct a two-part review of our fees before we pull them, how do we record having checked? And so on…
In other words, if you say you do it, show how you do it, and show how you checked to make sure it was done.
