Today, according to its press release, the NASD fined Merrill Lynch, Pierce Fenner & Smith Inc. $5 million for “supervisory failures, registration violations, impermissible sales contests and other violations” stemming from abuses at its New Jersey and Florida so-called “Financial Advisory Centers”(FAC). The NASD also prohibited Merrill Lynch from staging FAC personnel sales contests for three years, and ordered the firm “to retain, at its own expense, an independent consultant to recommend corrective measures to firm policies and supervisory and compliance procedures and systems for the FAC. Until those corrective measures are implemented, Merrill Lynch must impose special supervisory procedures, including monitoring calls between FAC personnel and its customers.”

The “other violations” committed by Merrill Lynch included “a pattern of mutual fund switch recommendations that were accompanied by misrepresentations and omissions of fact to customers,” permitting “individuals lacking the proper securities licenses and qualifications to be responsible for the supervision the ISAs” (the so-called “investment service advisors” at the FACs) and conducting “several sales contests which improperly awarded non-cash compensation to ISAs in the form of rock concert tickets, sporting events and dinners based solely on the sale of the firm’s proprietary mutual funds.”

Considering that the accounts at their peak in 2002 numbered about 1.3 million with about $20 billion in assets - with gross revenues to Merrill Lynch from FAC of around $210 million - the negligible $5 million fine trivializes the harm done to investors and undermines the imperative of fostering the integrity of the markets. The underlying issue of interest to investors is that since 2001 Merrill Lynch shepherded over 1 million of what it deemed “smaller” investor accounts (assets of $100,000 or less) to FAC representatives. In other words, Merrill Lynch not only banished smaller investors from its full service branch offices, but more significantly deprived these customers of the safeguards of licensed supervisors and the expertise of its full service “financial advisors.”