CSG Law Alert: FINRA Enforcement Brings First Reg BI Case Based on Account-Type Recommendations

In adopting Regulation Best Interest (Reg BI), the SEC emphasized that the new standards it imposed applied to “account-type” recommendations to retail customers. In the Adopting Release, the SEC described this addition as a “key enhancement” to the prior suitability rule. In the four-plus years since Reg BI’s effective date, however, FINRA had not brought an enforcement action against a firm or individual relating to account-type recommendations—that is, until now.

FINRA recently issued a Letter of Acceptance, Waiver, and Consent (AWC) charging Merrill Lynch with violating Reg BI’s Compliance Obligation. According to the AWC, a number of Merrill Lynch financial advisors (FAs), who were dually registered as brokers and investment advisers, recommended that customers purchase “new-issue” products in their brokerage accounts and then, shortly thereafter, recommended that the customers transfer the products to their advisory accounts.

If the new-issue products had been purchased in the customers’ advisory accounts in the first place, Merrill Lynch would have applied a 12-month waiver of the advisory fees that otherwise would have been charged. However, because the products were purchased in brokerage accounts, the waiver was not applied. In essence, the customers paid for the same product twice—once via a commission (or sales charge) in the brokerage account, and then via an asset management fee in the advisory account. As part of the settlement, FINRA ordered Merrill Lynch to return to investors nearly $1.5 million in “avoidable fees.”

This case is notable for a number of reasons.

First, before this case there was an open question as to whether FINRA had jurisdiction over these kinds of account-type recommendations—i.e., how can FINRA determine that a dually registered FA should have recommended the purchase of a security in the customer’s advisory account (as opposed to a brokerage account), if FINRA does not have jurisdiction over advisory accounts? Here, FINRA appears to have been comfortable asserting jurisdiction because the problematic recommendations were made in brokerage accounts. Indeed, the AWC takes pain to emphasize this point, repeatedly describing the recommendations as “brokerage recommendations”:

  • “[t]hese brokerage recommendations,”
  • “[t]hese types of brokerage recommendations,”
  • “the brokerage purchase of these products,” and
  • “the brokerage recommendations.”

We get it—the problematic recommendations here were made in brokerage accounts. But what if the facts were different? What if a dually registered FA recommended the purchase of a product in an advisory account when a better or more cost-effective option was available in a brokerage account? Would FINRA assert jurisdiction in that case? The answer remains to be seen.

Regardless, the Merrill Lynch case is a warning to firms with dually registered FAs to review their supervisory systems and procedures with respect to account-type recommendations and, in particular, transfers between account types. In its 2024 Annual Regulatory Oversight Report, FINRA outlined a number of factors that firms and representatives should consider pursuant to Reg BI when recommending an account type including, for example, the projected costs of the recommended account versus alternative account types. Firms also may wish to revisit the SEC staff’s FAQs on account-type recommendations, linked here: https://www.sec.gov/tm/iabd-staff-bulletin.

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