FINRA says Merrill Lynch Deficiencies Related to Extended Settlement Transactions
According to the Financial Industry Regulatory Authority (FINRA), the regulator has fined Merrill Lynch, Pierce, Fenner & Smith Incorporated $1.4 million. The company reportedly failed to establish a reasonable supervisory system and procedures to identify and evaluate extended settlement transactions, and for related rule violations.
In settling this matter, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
As a result of its supervisory deficiencies, Merrill failed to collect adequate margin to offset risk from extended settlement transactions. FINRA claims the company improperly extended credit to cash-account customers, and miscalculated its outstanding margin and net capital.
FINRA found that from April 2013 through June 2015, Merrill’s customers engaged in extended settlement transactions with notional values of hundreds of millions of dollars across numerous firm product lines.
Despite the prevalence of these transactions, Merrill’s supervisory system was not reasonably designed to identify and evaluate extended settlement transactions for compliance with margin and net capital rules.
Consequently, Merrill’s computation of margin requirements and net capital deductions for tens of thousands of extended settlement transactions was inaccurate. This resulted in margin rule and net capital violations, as well as inaccurate books and records and FOCUS Report filings.
FINRA also found that Merrill improperly extended hundreds of millions of dollars of margin credit in numerous retail customers’ cash accounts, in violation of Regulation T. These transactions should only have been permitted in margin accounts, not in customer cash accounts.
The company reportedly knew that its supervisory system was not reasonably designed to achieve compliance in connection with extended settlement transactions by April 2013. However, FINRA says Merrill failed to implement any remedial measures until mid-2014.
Additionally, Merrill allegedly failed to establish a firm-wide supervisory system and written procedures to address extended settlement transactions until mid-2015. FINRA found that Merrill’s failures to promptly address the deficiencies after it knew about them unreasonably delayed its compliance with applicable margin, net capital, and books and records rules, as well as Regulation T.
This information, which is publicly available on FINRA’s website has been provided by The White Law Group.
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