The Financial Industry Regulatory Authority (FINRA) announced
today that it has fined Merrill Lynch, Pierce, Fenner & Smith Inc. $1.05
million for failing to provide best execution in certain customer
transactions involving non-convertible preferred securities executed on one
of its proprietary order management systems (ML BondMarket), and for failing
to have an adequate supervisory system and written supervisory procedures in
place. Merrill Lynch was also ordered to pay more than $323,000 in
restitution, plus interest, to customers who did not receive best execution
for their trades in non-convertible preferred securities. Additionally,
FINRA has required Merrill Lynch to revise its written supervisory
procedures regarding ML BondMarket best execution obligations within 30
business days.
In any customer transaction, a firm or its registered persons must use
reasonable diligence to ensure that the purchase or sale price to the
customer is as favorable as possible under current market conditions. FINRA
found that Merrill Lynch had programmed a faulty pricing logic into ML
BondMarket that only incorporated quotations published on the primary
listing exchange for that non-convertible preferred security. As a result,
in instances when there was a better quote on a market other than the
primary listing exchange, that quote was not reflected on ML BondMarket. The
firm instead executed 12,259 transactions in non-convertible preferred
securities with its customers on ML BondMarket at prices that were inferior
to the National Best Bid and Offer (NBBO).
Thomas Gira, FINRA Executive Vice President and Head of Market Regulation,
said, "It is paramount that a broker-dealer's systems are adequately
designed to ensure that customers receive fair prices in securities
transactions. Merrill Lynch lacked the necessary systems and supervision to
ensure that it provided customers with the best execution of their
non-convertible preferred securities transactions which resulted in many
customers receiving inferior prices for more than four years."
FINRA also found that Merrill Lynch's supervisory system relating to ML
BondMarket was deficient in a number of respects. Merrill Lynch failed to
perform any post-execution review of non-convertible preferred transactions
executed on ML BondMarket to ensure compliance with its best execution
obligations. The firm also failed to enhance its supervisory review of
non-convertible preferred securities transactions executed on ML BondMarket
despite the fact that several thousand of such transactions were identified
on FINRA's best execution report cards and it had received several inquiry
letters from the staff.
In concluding this settlement, Merrill Lynch neither admitted nor denied the
charges, but consented to the entry of FINRA's findings.
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