FINRA Imposes $825,000 Penalty On Merrill Lynch, Pierce, Fenner & Smith

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Merrill Lynch, Pierce, Fenner & Smith has reached a settlement with the Financial Industry Regulatory Authority (FINRA), consenting to pay a fine totaling $825,000.

From February 2017 onwards, external investment managers, financial advisers, and customers utilized the firm’s electronic order systems to submit equity orders. Before routing these orders to market centers for further processing or execution, the firm conducted validation checks on the orders.

One of these systems, known as the Equity Order System (EOS), allowed external investment managers to transmit files containing numerous orders simultaneously.

Following the acceptance of order files into the EOS system, Merrill conducted validation checks to ensure the accuracy and completeness of the orders, including verification of various order terms. Once validated, the orders were sent to market centers for handling or execution.

During this period, Merrill’s supervisory system, along with its written supervisory procedures, was found to be inadequately designed to comply with Rule 5310.01. Specifically, Merrill only reviewed the timeliness of order execution after routing to market centers, neglecting to assess the time taken for electronic order systems to process and route orders.

This omission from supervisory reviews led to Merrill’s failure to ensure prompt and full execution of marketable customer orders, thus violating FINRA Rules 3110(a) and (b) and 2010.

Furthermore, Merrill’s supervisory system, including its written procedures, was deemed insufficient to meet SEC and FINRA recordkeeping requirements. Merrill did not conduct supervisory reviews to guarantee the accuracy of information recorded on the firm’s order memoranda for electronically received retail brokerage equity orders.

Consequently, Merrill was found in violation of FINRA Rules 3110(a) and (b) and 2010.

In addition to the imposed fine of $825,000, Merrill has accepted a censure.