The Street needs to clean up its act if it wants to maintain the accounts and serve the best interests of its smaller asset based clientele, now handled in many cases by impersonal phone call centers rather than by neighborhood branches. A few years ago most of the major brokerage firms decreed that their registered representatives were spending too much time on accounts with relatively low assets. Some firms even refused to pay its brokers commissions on accounts that traded with less than $50,000 or $100,000. The media duly chronicled the problems inherent in this shift in attitude at the expense of the smaller investor: “Wall Street Snubs Small Accounts,” the Wall Street Journal, February 17, 2005; “NASD probes Merrill Lynch ‘Call Centers,’” Wall Street Journal, October 18, 2005; and “Even Small Brokerages Shun Average Investors,” Crains New York Business, February 27, 2006.

Abuses at the Merrill Lynch call center, euphemistically called “Financial Advisory Center,” did not take long to surface. According to the NASD’s March 15 press release of its $5 million fine levied against Merrill Lynch, the firm apparently “promised around-the-clock customized financial advice from a ‘team of Merrill Lynch professionals.’” (as is customary in the industry in such settlements, the firm neither admitted nor denied the charges, but consented to the entry of the NASD’s findings). Far from the promised “professionals,” the brokers styled as “Investment Service Advisors” often had less than five years brokerage experience and were not permitted by the firm to make any recommendations beyond mutual funds. They were also not permitted to solicit orders in equities or bonds unless the client initiated the request. The NASD findings indicate that the call center brokers contravened these limitations by improperly soliciting securities transactions for their call center customers, reaping hundreds of millions of dollars in gross revenues for Merrill Lynch.

According to the NASD, the significant mutual fund switching that occurred at the call center, without adequate if any disclosures, meant that when some clients were advised to sell one mutual fund in order to buy another, the resulting unsuitable transactions brought in significant commissions without a real benefit, and possibly losses, to the clients.

Merrill Lynch’s compliance failure to adequately supervise the call center not only raised red flags with the regulator but was a clear invitation for abuse. The NASD noted a lack of adequate written supervisory procedures, a lack of properly trained and qualified supervisors to monitor the brokers’ activities and the failure to conduct annual compliance audits for two of the center’s most active periods. The result was that thousands of improper mutual fund switches slid by without adequate review. Supervisory failures also included the use of only a handful of sales managers who were unqualified and charged with supervising hundreds of brokers and thousands of transactions per day.

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