$1.5 million: FINRA fines Merrill Lynch over short positions

Rick Steves

Merrill only took action in October 2016, but its systems weren’t reasonably designed to achieve compliance nor prevent the consequences of such short positions.

The Financial Industry Regulatory Authority has fined Merrill Lynch over violations in short positions in municipal securities from February 2015 through June 2021.

FINRA alleged that Merrill failed to set up a supervisory system to monitor short positions in municipal securities and how they affect the customers who hold them.

The self-regulator has previously warned Merrill of the firm’s violation of rules governing such securities. Between March and December 2015, the number of such positions on the firm’s books and records that were aged more than 30 days rose to 231 days, representing an associated par value of $29,599,788.

The financial watchdog advised Merrill in September 2015 and again in May 2016 that it had to implement supervisory systems and written supervisory procedures to detect and resolve short positions in municipal securities in a timely manner, FINRA stated.

Merrill only took action in October 2016, but its systems weren’t reasonably designed to achieve compliance nor prevent the consequences of such short positions.

The bank allegedly failed to take timely steps to ensure that the short positions in municipal securities were in its control within 30 days. It also allegedly failed to give its customers notice about their receipt of substitute interest payments and the possible tax liability. Merrill has since then revamped its processes regarding short positions.

Without admitting or denying the findings, Merrill Lynch has agreed to a censure and to pay a fine of $1.5 million.

FINRA fined Merrill Lynch $150,000 in 2020 and $3.25 million in 2021

In 2020, FINRA fined Merrill Lynch $150,000 for having reported at least 11,625 short sales to a Trade Reporting Facility (“TRF”) without a required short sale indicator, from May 2012 to September 2017.

In addition, on July 14, 2015, the firm incorrectly marked thirty-two principal sell orders as long sales, when it should have marked the orders as short sales. The issue that caused these mismarked orders persisted for a period of at least ten months.

Furthermore, between approximately 2014 and 2018, the firm failed to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution or display of short sale orders at prices at or below the national best bid during a short sale circuit breaker.

Finally, during the period of July 2007 through March 2015, the firm reported as many as 6,174,868 non-media transactions’ in National Market System (“NMS”) equity securities to the FINRA/Nasdaq Trade Reporting Facility (“FNTRF”) with inaccurate capacity codes. The transactions were incorrectly reported as “principal” transactions, when they should have been reported as ”riskless principal” transactions.

In 2021, Merill agreed to pay $11,25 million to FINRA: $8.4 million in restitution to more than 3,000 customers who incurred potentially excessive sales charges in connection with early rollovers of Unit Investment Trusts (UITs) and $3.25 million for failing to reasonably supervise early UIT rollovers.

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