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FINRA Fines Merrill Lynch $8 Million & Millions Repaid to Retirement Accounts and Charities

FINRA announced last month that they fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts. Merrill Lynch was ordered to pay $24.4 million in restitution to affected customers, in addition to $64.8 million the firm has already repaid to disadvantaged investors.

Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “Merrill Lynch failed to offer available waivers to customers, including small business retirement accounts and charitable organizations. FINRA’s commitment to investor protection is highlighted by the significant restitution component of this settlement, which reinforces that investors must be able to trust that their brokerage firm will offer the lowest-cost share classes available to them. When firms fail to do so, we will take appropriate action.”

Merrill Lynch’s written supervisory procedures provided little information on the waivers. Even after the firm learned that it was not providing sales charge waivers to eligible accounts, Merrill Lynch relied on its financial advisors to waive the charges, but failed to adequately supervise the sale of these products or properly train or notify its financial advisors about lower-cost alternatives.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.

Alternative Mutual Funds under SEC Review

The increase of alternative mutual fund investments caught the eye of the U.S. Securities and Exchange Commission. The SEC will be launching investigations on fund companies targeting funds’ leverage, liquidity and other concerns.

Director of the SEC’s Division of Investment Management, Norm Champ, says, “The series of examinations, which will likely begin this summer or fall and will also gauge funds’ compliance with securities industry laws and regulations.”

Champ originally made the remarks at a seminar for lawyers in New York last week and it includes many details about the imminent investigations, which are available at 1.usa.gov/1ssp3IS

In January, the SEC issued a risk alert directing investment advisers to be cautious when they conduct due diligence, or research, alternative investments.

Does your advisor know enough about alternative investments?

You may want to take caution when discussing alternative investments with your financial representative. In a survey by Natixis Global Asset Management, they found that only 31% of advisors said they feel they understand alternative investments “very well,” with 53% of advisors saying alternatives are “often too complex to explain.” And yet, 89% of advisors put at least some of their clients’ money in these alternative investments.

Determining whether an alternative is accomplishing its goal is difficult, Wall Street Journal investigating columnist Jason Zweig states, but he suggests that consumers ask advisors what benchmarks they will use to evaluate each investment that is recommended. This has two key benefits for consumers:

  • It will tease out how well the advisor understands the alternative investments being recommended.
  • It will make sure that the advisor doesn’t change the benchmark later.

Regarding this advice, it’s important to know under what circumstances the investment will do well or poorly under. The benefit of identifying the right benchmark is that it helps make sure that the advisor really knows the role of the investment in their clients’ portfolios.

401K Rollovers: A Dangerous Time for Investors

When you’ve worked for 10-30 years or more with one employer, you can successfully sock away hundreds of thousands of dollars in your 401K. But when your employment ends, you have to make a decision about what to do with your funds.

For many investors, the 401K account is the only investing they’ve ever done. In a typical 401K, the company offers 20-50 mutual funds in which the investor can choose any allocation.  Some investors have never had a brokerage account or relationship with anyone other than their 401K plan. So, why is the end of employment so risky for investors?

Since many investors have no financial advisor to turn to for advice, they get referred to one by a friend at work, church,  or a family member. The friend at work will usually tout a broker who has worked with many other retirees from  the company before, and is really familiar with how to rollover the company 401K into an IRA account. This creates an imaginary feeling that the investor can trust this broker.

For some brokers, they view this situation as shooting fish in a barrel. You have a very unsophisticated investor who is thinking about rolling over a fat six figure 401K account into an IRA. Most investors think that since the employment is ending, they have to move their funds out of their 401K. This is not always the case. But some brokers make you think this is your only option. Why do they do this? Because of the substantial commissions or fees they make off the roll-over and new investments.

But how does this go wrong for some investors? First, since the investor is no longer working, they look to their brokerage account to supplement their other limited income from social security, a spouse’s salary,  or other pensions. Some financial advisors incorrectly tell investors that they can take out 8-12% easily from their IRA account and not lose any principal. This is usually not the case. Academic research has shown that if an investor withdrawals more than 4% of his/her principal, principal may decline over a period of years, and can ultimately run out during the investor ‘s lifetime.

Another problem arises from the types of investments made by the financial advisor. In some instances, the investor is exposed to too risky of a portfolio, i.e. too high of a percentage in stocks or similar equity investments.  Other financial advisors concentrate too much of an investor’s portfolio in insurance products such as variable annuities or illiquid investments like non-publicly traded REITS. These types of investments are almost always unsuitable per se for an IRA account.

What should an investor do to avoid getting taken of advantage of at this delicate time? First, don’t be in any hurry to move out of the 401K  if the employer doesn’t require you to do so. Haste will sometimes lead to bad decisions. Second, check out any financial advisor you are considering. Google his or her name and see what turns up. Check out his/her public record on www.brokercheck.com . Compare brokers like you compare prices at a grocery or retail store,. Interview at least 3 different advisors to find the one you like the best. Ask them how they make their money off of you and your account (then watch some of them squirm).  Finally, watch your account closely and if you see losses occurring that are out of line with your expectations and risk tolerance, tell your advisor to get you out of your investments and into cash. Then try again for a better advisor.

$5 Million Settlement with Morgan Stanley Announced

Howard F. Pitkin, Banking Commissioner, announced today that a $5 million settlement with Morgan Stanley Smith Barney LLC (MSSB) to resolve allegations the company failed to adhere to certain requirements relating to its supervisory responsibilities as a Connecticut registered Broker-Dealer.

Commissioner Pitkin said “This settlement reflects many months of hard work by our Securities Division.  I commend them for their diligent and thorough work in continuing to protect Connecticut’s investing community.”

This settlement was reflected in a June 9, 2014 Consent Order with the firm that alleged the firm failed to establish, enforce, and maintain an adequate supervisory system. As well as many other allegations you can find here in a copy of the Consent Order found on the Department of Banking’s website.

Attorney Mark Maddox has article featured in the IBJ

Indiana Primary Elections: The Bell Tolls For Thee

It’s time to get rid of primary elections in Indiana. Just because we’ve been using them for many years for every race from dog catcher up to president is not good enough to keep incurring these unnecessary costs while disengaging our voters.

Our primaries have many shortcomings. They are incredibly boring to the poll workers who work 13 hour shifts and the voters who must endure them. As a long time poll worker, they are painful and serve no good purpose. Pick the most boring thing you can think of doing for 13 hours, and I’d rather do that than work in another primary poll. As I drove my precinct’s election results to the collection facility (in which votes were cast by about 7% of eligible adult voters in our neighborhood), I had to navigate around numerous pot holes and city parks in need of some serious maintenance. The roughly $1 Million we spent in Marion County on the primary could have been better allocated to almost any worthy community project other than the primary budget waster.


Why do less than 10% of eligible adults vote in our primaries? After you get past the general apathy factor, most don’t vote because there is simply nothing of value to vote for. The respective slating conventions for the 2 major political parties have already established the field for the November general elections. At the primary, we simply require the most loyal party voters to come in and vote the party slate, making it official. And if anyone tries to run against the party slate, the traitor will be publicly humiliated by a resounding defeat. There is no good reason for Marion County to waste a cool $1 Million to make official the slated candidates who were chosen by their parties a few weeks earlier.

Independent voters are a growing component of our electorate. But there is no place for them in a primary election.  In virtually every precinct during a primary , you see independent voters  being told they have to publicly declare themselves more likely to vote for democrats or republicans in the November general election by virtue of the primary ballot they select. This leaves many independents confused, angry, and with a negative voting experience.

Getting rid of primaries would have the added effect of breathing new life into our county and state political parties, which seem to have declined in stature and value over the years. Additionally, the slating/nominating process will become an even more important source of revenue for the parties coffers.  More future candidates will have more meaningful apprenticeships in their respective political parties before they run for office, which can’t be all bad.

The only hesitation I have about scrapping all primaries in Indiana relates to the once every 4 year presidential election. In most presidential elections, by the time Indiana’s primary comes up in the first week of May,  the nominee has already been determined. However, this was not the case in the 2008 Democratic primary between Barak Obama and Hillary Clinton. A very close and historic election brought many interested voters to the polls.  But this was unfortunately an aberration to the general experience of Indiana not being important in a typical presidential year. Who’s to say that if Indiana went to a party caucus system for its presidential election that similar interest wouldn’t be accommodated in those rare years where the race isn’t over by May.

The General Assembly should start looking at scrapping our primary elections in favor of a party nominating system. Not a dollar more of our public treasure should be wasted on primaries, where we simply rubber stamp the party slates.  And if they listen to me, next May you’ll find me watching paint dry or grass grow as opposed to manning the empty voting booths in the gym of Mary Castle elementary. I will miss those free cookies.

Leveraged ETFs May ‘Blow Up’ Industry, says Fink

BlackRock Inc. (BLK)’s Laurence D. Fink oversees the world’s biggest exchange-traded fund lineup. Fink says, “BlackRock would never do a leveraged ETF and he doesn’t understand why the U.S. Securities and Exchange Commission allows them to operate.”

Becoming increasingly complex as firms try to appeal to a more diverse base of investors, ETF’s have turned into one of the most popular investing vehicles over the past decade. Leveraged ETF’s use swaps or derivatives to try to amplify daily index return, while the majority of ETF’s mimic indexes. Leveraged and inverse ETFs have come under scrutiny, the SEC warned brokers and investors that the vehicles weren’t appropriate for long-term investors, over several issues since 2009.

“Wolf of Wall Street” Vows to Repay Fraud Victims

Jordan Belfort, a motivational speaker, is planning on using his earnings from a speaking tour to repay $50 million to the investors he wronged during his time as a broker, which was characterized by the film “Wolf of Wall Street”.

He is expected to make around $100 million this year, but will only be repaying back his share of the fine, which is $50 million to the victims of his fraud.

“After six months of putting all the profit from the U.S. tour into an escrow account, it will go directly back to investors,” Belfort said. ”Once everyone is paid back, believe me I will feel a lot better.”

Nontraditional Bond Funds may lead to Risky Business

Investors wanting larger yields have been putting their money into so-called nontraditional bond funds, unaware of the added risks they can pose. Danielle Donahoes, president of Rinehart Wealth Management in Charlotte, N.C., says “Investors think fixed income and they think bonds and they think safety, but in many cases nontraditional bonds mean buying instruments that have a more risky profile”. U.S. Treasuries and high quality corporate bonds tend to dominate the fixed income markets and are considered ultra-safe. Nontraditional bond funds on the other hand can be invested into the debt of lower-rated companies, emerging-market government bonds and other securities that offer higher yields, but greater risks. Investors looking to allocate money for their fixed income clients should spread their investment across six or seven different segments of the bond market, where the risks and rewards look clearer.

“Just Say No” to Non-Traded REITs

Investors are better off in diversified portfolios of traded REITs than the underperforming non-traded REITs, because non-traded REITs are high cost, contain lack of transparency, illiquidity, & many times are a conflict of interest. It is wiser to go with a lower risk, higher return alternative. Many broker/dealer firms still buy into the stories of non-traded REITs because they blindly believe the SEC filings, the independent due diligence reports are more important. The audit , SEC filings and independent boards do nothing to protect investors from bad or untimely business plans or poor investment structures.

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