FINRA Fines Merrill Lynch $2.8 Million for Systemic Reporting, Books and Records, and Related Supervisory Violations

The Financial Industry Regulatory Authority (FINRA) announced today that it has 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. FINRA uses trade reporting and OATS data as an […]

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The Financial Industry Regulatory Authority (FINRA) announced today that it has 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.

FINRA uses trade reporting and OATS data as an integral part of its automated market surveillance program to detect manipulative activity and other potential violations of FINRA rules and the federal securities laws. FINRA relies on the accuracy of a firm’s books and records to conduct adequate policing of the securities markets.

FINRA found that a system configuration error caused Merrill Lynch to, among other things, inaccurately report millions of trades to a FINRA Trade Reporting Facility in which purchases were reported as principal sales and agency crosses.

Merrill Lynch also reported millions of trades it was not required to report. In addition, over the course of almost five years, the firm encountered a number of separate system errors that caused it to report millions of inaccurate reportable order events to OATS, including inaccurate timestamps, broker-dealer orders reported as customer orders and a failure to report millions of execution reports. Moreover, FINRA found that, for approximately three years, Merrill Lynch failed to record certain special handling instructions, as well as the correct receipt and route timestamps on order tickets, which caused millions of records to be inaccurate.

Thomas Gira, FINRA Executive Vice President and Head of Market Regulation, said, “A critical component of market integrity is the ability of regulators to rely on the accuracy of the information reported by broker-dealers. The failure to report accurate audit trail information adversely affects not only FINRA, but other market participants and the investing public.”

FINRA also found that the scope of Merrill Lynch’s supervisory system with respect to, among other things, trade reporting, OATS reporting, and books and records, was not reasonably designed.

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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