FINRA Fines Merrill Lynch $6M For Supervisory Failures and REG SHO Violations

The Financial Industry Regulatory Authority is fining and censuring Merrill Lynch, Pierce, Fenner & Smith Incorporated $2.5M for not setting up, maintaining, and enforcing supervisory procedures and systems related to certain areas, including Regulation SHO. The self-regulatory organization is fining Merrill Lynch Professional Clearing Corp. $3.5M, also for Reg SHO violations. Bank of America (BAC), which acquired Merrill Lynch in 2008, will pay the $6M fines to FINRA.

Reg SHO is an SEC rule governing short sales. One of its purposes is to curb abusive naked short selling. The regulation also seeks to lower the incidents of sellers neglecting to deliver securities in a timely manner by requiring firms to timely “close out” fail-to-deliver positions by purchasing or borrowing securities of similar type and quantity. It lets firms reasonably allocate fail-to-deliver positions to brokerage firm clients that contributed or caused those positions.

According to the SRO, from 9/08 through 7/12, Merrill Lynch PRO failed to close out certain fail-to-deliver position, and, for most of that period, lacked the necessary procedures and systems to handle REG Show close-out requirements. FINRA said that from 09/08 through 3/011, the firm’s supervisory systems and procedures were not sufficient, making it possible for the firm to improperly allocate fail-to-deliver positions to the brokerage firm’s clients on the basis of clients’ short positions while not having to heed clients played a part in the fail-to-deliver positions.

In August, it was the U.S. Commodity Futures Trading Commission that imposed a $1.2 million fine against Merrill Lynch. The regulator charged the brokerage firm with inadequate supervision that led to customers being charged excessive fees from at least 1/10 through 4/13. The settlement was reached without admission or denial of the findings.

The CFTC claims that for over two years, there were problems with firm’s process for fee reconciliation, which involves noting and fixing discrepancies between the invoices from exchange clearinghouses and how much customers were charged. Because of this, some Merrill clients were undercharged and others were overcharged. This resulted unexplained extra fees of $451,318 that were paid by 196 clients.

The agency said that Merrill Lynch failed to hire qualified staff to oversee and perform fee reconciliations and did not provide completed manuals to staff on how to perform fee reconciliations until at least last year. Staff was inadequately trained on how to conduct fee reconciliations.

FINRA Fines Merrill Lynch a Total of $6 Million for Reg SHO Violations and Supervisory Failures, FINRA, October 27, 2014

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