Merrill Lynch, Pierce, Fenner & Smith Incorporated (New York, NY) agreed to pay $500K and incur other sanctions to settle FINRA charges the firm, among other things, did not adequately ensure that out-of-state 529 plans complied with industry suitability standards.   During the period in question, Merrill RR's sold over $3 billion in 529 plans.

While the firm, in fact, required RR's to consider potential state tax benefits offered by a state in which a client resides as a factor before recommending an out-of-state 529 plan, it allegedly failed to establish and maintain specific procedures for achieving compliance with such industry suitability standards.  FINRA further alleged that:

• Merrill's WSP's allegedly did not adequately ensure that its RR's were considering state income tax benefits during their 529 suitability analyses.
• Merrill failed to establish and maintain WSP's requiring supervisors to perform and document reviews to determine if RR's were complying with suitability requirements before recommending a 529 plan purchase.
• Merrill did not have effective procedures relating to documenting its suitability determinations in connection with the sale of 529 plans.

    Additional Sanctions.   Within 60 days of executing the AWC, Merrill had to issue a standalone letter to each current customer who resided in a state that offered 529-related state tax benefits at the time the customer opened an advisor-sold specific 529 plan account at the firm from June 2002 through February 2007.

• the letter instructed customers to call a designated firm phone number with questions, concerns, complaints re: their 529 investment. 
• Merrill must assist any callers with transferring or rolling over any of their investment in the specific plan into a 529 plan of the customer’s choice within his/her home state, regardless of whether the firm currently offered such 529 plan, at no cost to client. 
• Merrill also must pick up all costs in connection with the initial purchase of the replacement 529 plan.

Merrill also must submit, until 12/31/11, a semi-annual report to FINRA (or upon FINRA request) describing each client question, oral/written inquiry, concern or complaint, and how the firm addressed or resolved such inquiries, concerns or complaints.   (FINRA Case #2009018907001)  

For further details on this and other cases, go to:   [FINRA Disciplinary Actions for January]