FINRA says that Merrill Lynch, Pierce, Fenner & Smith Inc. has inadequately supervised customers’ use of leverage for their brokerage accounts.
The Financial Industry Regulatory Authority (FINRA) reports that it has fined Merrill Lynch, Pierce, Fenner & Smith Inc. $6.25 million, for “inadequately supervising its customers’ use of leverage in their Merrill brokerage accounts.”
In addition, the firm will pay approximately $780,000 in restitution. Merrill Lynch neither admitted nor denied the charges, FINRA says.
Merrill Lynch, Pierce, Fenner & Smith Inc. is the broker-dealer arm of Merrill Lynch & Co., owned since the most volatile days of 2008 financial crisis by the Bank of America, which, according to crisis press accounts, bought it in a $50 billion deal to stave off Merrill’s imminent Lehman Brothers-like bankruptcy.
The November 2016 fines for inadequate supervision arise from Merrill Lynch’s loan management accounts (LMAs), which are “lines of credit that allow the firm’s customers to borrow money from an affiliated bank using the securities held in their brokerage accounts as collateral. FINRA found that from January 2010 through November 2014, Merrill lacked adequate supervisory systems and procedures regarding its customers’ use of proceeds from these LMAs.”
Even though “both Merrill policy and the terms of the non-purpose LMA agreements prohibited customers from using LMA proceeds to buy many types of securities, the firm’s supervisory systems and procedures were not reasonably designed to detect or prevent such use,” according to FINRA.
Furthermore, “during the relevant period, on thousands of occasions, Merrill brokerage accounts collectively bought hundreds of millions of dollars of securities within 14 days after receiving incoming transfers of LMA proceeds.”
Separately, FINRA contends that, “from January 2010 through July 2013, Merrill lacked adequate supervisory systems and procedures to ensure the suitability of transactions in certain Puerto Rican securities, including municipal bonds and closed-end funds, where customers’ holdings were highly concentrated in such securities and highly leveraged through either LMAs or margin. FINRA further found that during the relevant period, 25 leveraged customers with modest net worths and conservative or moderate investment objectives, and with 75 percent or more of their account assets invested in Puerto Rican securities, suffered aggregate losses of nearly $1.2 million as a result of liquidating those securities to meet margin calls.”
“Some” of those Puerto Rican-securities customers have already been reimbursed, FINRA says. And, “as part of the settlement, [Merrill] will pay approximately $780,000 in restitution to the remaining 22 customers affected.”
The November charges and fines follow after two other 2016 FINRA fines against Merrill Lynch, both for supervisory violations.
In October 2016, the financial authority “fined Merrill Lynch, Pierce, Fenner and Smith Inc. $2.8 million for systemic trade reporting, Order Audit Trail System (OATS) reporting, books and records, and related supervisory violations that occurred over a period of several years.”
In the October case, “FINRA accused Merrill Lynch of submitting millions of inaccurate trades, some which listed purchases as sales, broker-dealer trade orders filed as customer orders, inaccurate or incomplete order events and audit data, and several million orders it just did not need to submit, among other things,” according to a report at the time by the Reuters news service.
An in June 2016, FINRA “fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $5 million for negligent disclosure failures in connection with the sale of five-year senior debt notes to retail customers. In particular, Merrill Lynch failed to adequately disclose certain costs, making it appear that the fixed costs were lower than they actually were.”
In the June case, FINRA “found that Merrill Lynch did not adequately disclose the execution factor in the offering documents or sales material. Instead, the firm emphasized that customers would be subject to a 2 percent sales commission and a 0.75 percent annual fee in connection with the notes. Merrill Lynch’s disclosures therefore made it appear as if the notes had relatively low fixed costs. As a result, the firm’s disclosures in the offering documents pertaining to the fixed costs were materially misleading to customers.”
In both the October and June cases as well, Merrill Lynch neither admitted nor denied the charges.
FTF News contacted Merrill Lynch press representatives regarding the November, October and June FINRA fines.
A Merrill spokesperson replied with a statement that addressed the November FINRA settlement only, noting that, because “other settlements were for other issues we don’t have one all-encompassing statement.” Merrill’s statement specifically addressing the November settlement with FINRA follows:
“Following a comprehensive internal review of our loan management accounts, we reported issues to FINRA, cooperated fully with their inquiry and have strengthened our controls and procedures.”
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