Today, FINRA issued a press release announcing that it had ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers in connection with “unsuitable sales of sale of floating-rate bank loan funds.” Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, was also ordered to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customer. Floating-rate bank loan funds are mutual funds that “generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.”
According to the press release:
FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers. FINRA also found that the firms failed to train their sales forces regarding the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds.
(Emphasis added). Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
In October of 2012, FINRA Chairman Richard G. Ketchum spoke on the the risks concerning floating-rate bank loan funds:
Another product that has become popular with retail investors is floating rate loan funds or “levered loan” funds. These levered loan mutual funds and closed-end funds, which invest in floating-rate loans extended by financial institutions to companies of lower credit quality, are sometimes marketed inappropriately. We have seen instances where these funds have been sold with inadequate disclosures about the funds’ credit quality. In some instances the funds have been misrepresented as high-yielding, money market-like instruments.