CEFs are investment companies that sell a fixed number of shares in an initial public offering which are then traded on a secondary market, normally at a discount.

The CEFs at issue have sales charges of 4.5 per cent, as well as a penalty bid period of generally 30 to 90 days immediately following the IPO.

The regulator was concerned that brokers were urging their customers to buy CEFs during the IPO and then sell the CEF soon after the penalty period. Since CEFs are more suitable as long term investments, customers would often sell too soon and at a loss. Yet brokers were earning high fees for each purchase and customers faced sales charges when they bought during the IPO.

"Closed-end funds possess complex features that can give rise to unsuitability for short-term investors, particularly when purchased at the initial public offering. Neither Merrill nor UBS had adequate supervisory systems and procedures to prevent brokers from engaging in unsuitable short-term sales of newly issued CEFs," said Susan Merrill, FINRA executive vice president and chief of enforcement.
 
A spokesman from UBS said they were glad the issue had been resolved, while Merrill has given assurances that all losses relating to CEFs have been reimbursed.

Both banks instigated internal investigations resulting in Merrill Lynch sanctioning 13 brokers and paying customers $3 million and UBS sanctioning 17 brokers and paying out $2 million in recompense. The self-reviews and prompt remedial measures were taken into account by FINRA in their sanctioning.

Both companies were criticised for providing insufficient training and guidance to their own brokers regarding the unsuitability of short term CEFs.

FINRA is the largest independent regulator for all securities firms doing business in the United States.