ComplianceJuly 28, 2009

FINRA Fines Merrill, UBS Related to Closed-End Funds Sales

<p>The Financial Industry Regulatory Authority (FINRA) said it has fined Merrill Lynch, Pierce, Fenner & Smith, Inc. and UBS, as well as some Merrill brokers, for supervisory failures related to the sale of closed-end funds (CEFs).</p>

Reported by Ellie Behling

Merrill Lynch, Pierce, Fenner & Smith, Inc. (acquired by Bank of America) was fined $150,000 and UBS was fined $100,000 for the failures that FINRA said led to unsuitable short-term sales of CEFs purchased at the funds’ initial public offerings (IPOs), according to a news release.

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

FINRA said Merrill Lynch and UBS did not have adequate supervisory systems and procedures designed to detect and prevent unsuitable short-term trading of CEFs. The firms failed to provide guidance to both supervisors and registered persons. As a result, certain UBS and Merrill brokers recommended CEF purchases at the IPO and subsequent short-term sales without having a sufficient understanding of the effects that the sales charges and other pricing considerations had on the clients’ investments, according to FINRA.

“Closed-end funds possess complex features that can give rise to unsuitability for short-term investors, particularly when purchased at the initial public offering,” said Susan Merrill, FINRA executive vice president and chief of enforcement. “Neither Merrill nor UBS had adequate supervisory systems and procedures to prevent brokers from engaging in unsuitable short-term sales of newly issued CEFs.”

The five Merrill Lynch brokers sanctioned by FINRA for recommending the unsuitable short-term sales of CEFs are:

Kenneth C. Iwelumo of the Newark, New Jersey, branch, whose customers suffered losses totaling approximately $563,000.
Ronald Kemp of the Denver branch, whose customers suffered losses totaling approximately $411,000.
Joseph Miller of the Springfield, Massachusetts, branch, whose customers suffered losses totaling approximately $130,000.
John Ong of the New York City branch, whose customers’ suffered losses totaling approximately $350,000.
Michael Kizman of the Schaumburg, Illinois, branch, whose customers suffered losses totaling approximately $221,000.

Merrill Lynch, UBS, and the Merrill brokers neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.