In ‘extraordinary remedy,’ ex-Merrill advisors’ BrokerCheck complaint is expunged

Two advisors will once again have clean BrokerCheck records after a FINRA arbitrator agreed to expunge a seven-year old client complaint related to a Merrill Lynch product snafu that cost the firm millions in regulatory penalties.

Last week, in an unusually long arbitration award that featured a note from the client, a FINRA arbitrator found that Merrill Lynch, not George D. Ewins Jr. and Richard J. Kowalski, bear responsibility for alleged misrepresentations in disclosures concerning the costs associated with the product.

“Expungement is an extraordinary remedy,” arbitrator Louis Miron wrote March 11. But neither advisor “was responsible for the failure of Merrill Lynch and [Bank of America] to make the requisite disclosures concerning the fixed costs associated with the strategic return notes.”

Ewins and Kowalski, with a cumulative 59 years in the industry, have only this single complaint listed on their FINRA BrokerCheck records. The customer had alleged unsuitable investment recommendations and misrepresentations, according to the BrokerCheck note, which specified the complaint was settled by Merrill Lynch for $115,000. The advisors, who now work at Raymond James in Burlington, Vermont, denied the allegations.

The complex products, strategic return notes, were linked to Merrill Lynch’s proprietary volatility index, which was structured to track volatility in the equities markets by rebalancing S&P 500 Index options contracts through a series of simulated trades, according to a FINRA disciplinary action. In 2010 and 2011, Merrill Lynch sold approximately $168 million worth of the notes to its retail customers, promoting them as a hedge against potential downturns in the equities markets.

FINRA and the SEC said that Merrill failed to properly disclose all the costs associated with the product, including a so-called execution factor which was intended to replicate transaction costs incurred in the simulated buying and selling of S&P 500 Index options. These transaction costs totaled about 1.5% per quarter, according to the regulators.

In 2016, Merrill Lynch agreed to pay $10 million to the SEC and $5 million to FINRA to settle charges that it had misled investors. A Wall Street Journal story that same year said the investments fell as much as 95% in value and prompted two of the wirehouse’s brokers to take their complaints to the SEC. The commission later awarded them a $3 million whistleblower award.

A company spokesman declined to comment.

Ewins and Kowalski’s client, who is unnamed in regulatory records, participated in the hearing and the arbitrator included a lengthy note from the client in the arbitration award itself.

“I would like to make clear I personally do not have a problem with a potential expungement of the petitioner’s record if they have met the burden for their record to be cleared,” the client wrote, adding that he did take issue with some statements made in the expungement request.

The attorney who represented the advisors, Robert Moses, says that although he’s seen clients participate in expungement requests in the past, it’s not common. Moses, who is with New York law firm Lax & Neville, says some advisors pursue expungement requests because they fear losing potential clients due to disclosures. Moses adds that he isn’t aware of Ewins and Kowalski losing any business because of this single disclosure.

“But that’s the thing. You don’t know if you are losing business,” Moses says.

Still, Ewins and Kowalski are pleased to put the matter behind them. “They feel vindicated and relieved,” Moses says.