Merrill Lynch Faces Dual FINRA Penalties for Compliance Failures

Merrill Lynch has agreed to pay combined penalties totaling more than $400,000 to settle two separate enforcement actions with the Financial Industry Regulatory Authority over failures in customer complaint reporting and municipal bond disclosure practices. The settlements highlight systemic gaps in the firm's supervisory infrastructure that affected complaint tracking and securities sales across multiple divisions between 2018 and 2023.

Customer Complaint Reporting Failure

The firm accepted a $225,000 fine and censure after failing to identify and report approximately 1,600 customer complaints submitted through post-call surveys over a five-year period. From 2018 through 2023, Merrill Lynch's supervisory system relied on a search lexicon designed for consumer banking products rather than broker-dealer operations, making it unsuitable for identifying reportable complaints from wealth management and self-directed trading customers.

The volume of unprocessed feedback was substantial. In 2023 alone, the firm received more than 220,000 survey responses and identified roughly 2,400 complaints—but the improperly programmed system caused thousands of others to be overlooked. Among the missed complaints were reports of customers unable to access funds, difficulty obtaining account documents, technical problems with online platforms, and security incidents. FINRA credited Merrill for self-reporting the issue and subsequently reviewing and reporting the backlog of complaints from 2023.

Municipal Securities Disclosure Violation

A separate $175,000 fine addressed disclosure failures spanning January 2021 through September 2023. During this period, Merrill Lynch failed to disclose non-de minimis market discounts to customers in 4,181 purchases of municipal securities worth approximately $87 million across 1,072 self-directed accounts. Market discounts on municipal bonds can have significant tax implications, as portions of investor returns may be taxable as ordinary income rather than capital gains.

The firm lacked written procedures and supervisory processes specifically designed to ensure that self-directed platform customers received material information about market discounts at the time of trade. After the violation was identified, Merrill updated its procedures and added automated market discount disclosures to its self-directed trading system in September 2023. The firm subsequently offered compensation to affected customers who incurred additional tax liability.

Regulatory Conclusions

Both settlements reflect FINRA's determination that Merrill Lynch failed to maintain supervisory systems reasonably designed to ensure compliance with customer protection obligations. The firm agreed to the penalties without admitting or denying the findings. A Merrill spokesperson declined to comment on the settlements, and the firm's brokerage division continues to operate its Merrill Lynch Wealth Management franchise, Bank of America Private Bank, and Merrill Edge self-directed unit.