Merrill Lynch, Pierce, Fenner & Smith Incorporated has agreed to pay a fine of $175,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).

Between January 2021 and September 2023, Merrill Lynch did not disclose to customers non-de minimis market discounts in 4,181 purchases of municipal securities with a total principal value of approximately $87 million by 1,072 self-directed customer accounts.

The firm subsequently provided market discount disclosures to the impacted self-directed customers, as well as an offer to compensate the customers who demonstrated that they incurred tax liability above the capital gains rate as a result of purchasing the municipal securities.

During the same period, Merrill Lynch did not establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with the firm’s obligation to disclose to self-directed customers, at or prior to the time of trade, all material information regarding municipal securities that traded at a market discount, including that all or a portion of the investor’s investment return represented by accretion of the market discount might be taxable as ordinary income.

The firm’s written procedures did not address the firm’s obligation to provide time of trade disclosures regarding market discounts to customers who used the firm’s self-directed platform.

Moreover, the firm did not have any process to determine whether all material information regarding market discounts was provided to self-directed customers at or prior to the time of trade.

In September 2023, the firm updated its written procedures regarding the market discount disclosures for its self-directed platform, and added a market discount disclosure for applicable transactions on its self-directed platform.

Merrill Lynch violated MSRB Rules G-47 and G-27.

The firm has agreed to a censure in addition to the $175,000 fine.