Officials at Merrill Lynch, Pierce, Fenner and Smith (MLPF&S) say they are making changes in the wake of the charges.
Broker-dealer Merrill Lynch, Pierce, Fenner and Smith (MLPF&S) will be paying a $2.8 million fine to the self-regulatory organization, the Financial Industry Regulatory Authority (FINRA), for a variety of alleged reporting violations over several years that the firm acknowledges it is addressing.
FINRA officials say they are citing MLPF&S for systemic trade reporting problems, including Order Audit Trail System (OATS) reporting, books and records, and related supervisory violations, officials say.
“FINRA uses trade reporting and OATS data as an integral part of its automated market surveillance program to detect manipulative activity and other potential violations of FINRA rules and the federal securities laws,” according to a statement from the SRO. “FINRA relies on the accuracy of a firm’s books and records to conduct adequate policing of the securities markets.’
FINRA investigators uncovered “a system configuration error” that caused the firm to “inaccurately report millions of trades to a FINRA Trade Reporting Facility in which purchases were reported as principal sales and agency crosses,” according to FINRA. “Merrill Lynch also reported millions of trades it was not required to report.”
FINRA officials add that over almost five years, the firm had separate system errors leading to “millions of inaccurate reportable order events” sent to the OATS environment that included “inaccurate timestamps, broker-dealer orders reported as customer orders and a failure to report millions of execution reports,” according to FINRA. “Moreover, FINRA found that, for approximately three years, Merrill Lynch failed to record certain special handling instructions, as well as the correct receipt and route timestamps on order tickets, which caused millions of records to be inaccurate.”
The heart of the problem may be that “Merrill Lynch’s supervisory system with respect to, among other things, trade reporting, OATS reporting, and books and records, was not reasonably designed.”
While the settlement with FINRA specifies consent to the findings and that Merrill Lynch “neither admitted nor denied the charges,” the firm is taking action to change the situation.
“We have been working with regulators to improve our processes and systems to address these issues,” a spokesman for Merrill Lynch tells FTF News.
Overall, regulators such as FINRA need accurate data from broker-dealers in order to maintain market integrity, says Thomas Gira, FINRA executive vice president and head of market regulation, in a prepared statement. “The failure to report accurate audit trail information adversely affects not only FINRA, but other market participants and the investing public,” Gira adds.
MLPF&S acts as a broker for corporate, institutional, government, and other clients and as a dealer in the purchase and sale of various financial instruments, including corporate debt, equity securities, United States government securities, and U.S. government agency obligations, according to the firm’s Dec. 31, 2015 balance sheet.
Since early last year, MLPF&S has been a subsidiary of BAC North America Holding Company.
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