Merrill Lynch, the brokerage arm of Bank of America (BAC), has been fined $175,000 by the Financial Industry Regulatory Authority (FINRA) for failing to disclose material tax information to self-directed clients in municipal bond transactions. The penalty comes on the heels of a separate $225,000 censure for not properly reporting customer complaints, raising questions about the firm's oversight systems as its parent company pushes into new retail markets.
Details of the FINRA Fine
According to the FINRA settlement, Merrill Lynch failed to inform self-directed clients about non-de minimis market discounts on 4,181 municipal bond purchases between January 2021 and September 2023. These trades, spread across 1,072 accounts, had a total principal value of approximately $87 million. Under Municipal Securities Rulemaking Board rules, such discounts must be disclosed as they may be taxed as ordinary income rather than capital gains. Merrill subsequently provided disclosures to affected clients and offered compensation for any tax liabilities exceeding capital-gains rates. The firm updated its written procedures in September 2023 to include market-discount disclosures for self-directed trades where required.
Recent Censure for Complaint Reporting Failures
Just days earlier, Merrill was censured $225,000 for a separate issue: from 2018 to 2023, the firm's post-call survey system failed to flag over 1,600 customer complaints due to a programming flaw. While many were routine service issues, some involved access to funds, account information, and online security. Merrill received more than 220,000 written survey responses in 2023, reporting only about 2,400 as complaints. FINRA credited Merrill for self-reporting and for suspending the written comment section in January 2024.
Bank of America's Louisiana Expansion
These regulatory setbacks come as Bank of America prepares to open its first branch in Baton Rouge, Louisiana, with plans for a New Orleans financial center in 2027. CEO Brian Moynihan has described the expansion as a “high tech and high touch” strategy, aiming to blend digital services with in-person advice. However, the fines highlight potential gaps in back-office supervision as the bank scales its retail and digital offerings in new markets.
Market Context and Implications
While the $175,000 fine is a fraction of Bank of America’s $416.9 billion market capitalization, repeated regulatory findings could invite closer scrutiny from regulators and customers. The issues underscore the challenge of maintaining robust control systems amid a shift toward self-directed and digital trading platforms. Competitors like JPMorgan Chase and Wells Fargo are also expanding branch networks, making operational reliability a key competitive factor.
Bank of America shares last traded at $56.20. The company did not admit or deny FINRA’s findings in either settlement, and a spokesperson declined to comment.
