FINRA Fines Merrill Lynch Pierce Fenner & Smith Incorporated for Compliance Issues
According to FINRA, on May 16, 2017, Merrill Lynch Pierce Fenner & Smith Incorporated (CRD #7691, New York, New York) was issued an AWC in which the firm was censured; fined $650,000; ordered to pay $124,128.30, plus interest, in restitution to customers; and required to revise its WSPs.
Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that in non-convertible preferred securities transactions for or with a customer, the firm failed to use reasonable diligence to ascertain the best interdealer market, and failed to buy or sell in such market so that the resultant price to its customer was as favorable as possible under prevailing market conditions.
The findings stated that in 19 instances, the firm recorded an inaccurate order execution time on its books and records, submitted a trade report to the FNTRF that contained an inaccurate execution time, and submitted to the TRF a trade report that reflected the firm’s mark-up or mark-down in the reported unit price.
FINRA States Inaccurate Reporting
Separately, in 1,337 instances, the firm recorded an order receipt time that was inaccurate because it reflected a later time than the execution time reported to the FNTRF. The findings also stated that the firm issued inaccurate customer confirmations to its customers. The firm failed to disclose the difference between the price reported to the FNTRF and the price to the customer, which represented compensation to the firm, on trade confirmations sent to customers.
The price disclosed to the customer did not match the price reported to the FNTRF, but instead included a mark-up or mark-down. The findings also included that in OTC convertible preferred securities transactions for or with a customer, the firm failed to use reasonable diligence to ascertain the best inter-dealer market, and failed to buy or sell in such market so that the resultant price to its customer was as favorable as possible under prevailing market conditions.
Customers received an inferior price when there was sufficient displayed liquidity to execute the order in full at the better price, and the better price was displayed during the entire life cycle of the order. FINRA found that in OTC convertible preferred securities transactions, the firm failed to execute orders. The firm failed to obtain executions for these orders despite the fact that, at the time of order receipt, the OTC marketplace displayed two-sided quotations within the national best bid or offer that could have at least partially satisfied the order.
FINRA Questions Supervisory System
Merrill Lynch, Pierce, Fenner & Smith Incorporated failed to review automated quotations by market makers in OTC convertible preferred securities when it handled customer order flow in these securities. In 7,609 instances, the firm incorrectly marked a “held” market order as “not held.” FINRA also found that the firm’s supervisory system did not provide for supervision reasonably designed to achieve compliance with respect to certain applicable securities laws and regulations, and/or FINRA rules.
The firm’s WSPs failed to provide for the minimum requirements for adequate WSPs for executed transactions on the firm’s credit desk regarding equity trade reporting, accuracy of books and records, accuracy of customer confirmations, and for the timely handling of market orders in OTC convertible preferred securities.
Additionally, the Merrill Lynch, Pierce, Fenner & Smith Incorporated failed to provide documentary evidence that it performed the supervisory reviews in its WSPs concerning best execution of customer orders in OTC convertible preferred securities, and there were not any supervisory reviews to ensure that marketable customer orders were executed fully and promptly. The firm was also unable to product evidence that it performed best execution reviews for OTC convertible preferred securities.
For FINRA’s full findings see FINRA Case #2011028842101.
This information, which is publicly available on FINRA’s website has been provided by The White Law Group.
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