Merrill to Pay $850K FINRA Fine Over Short Sale Violations

The Financial Industry Regulatory Authority has hit Merrill Lynch with an $850,000 fine for alleged violations related to short sales, according to FINRA.

Without admitting or denying FINRA’s findings, the firm signed a FINRA letter of acceptance, waiver and consent last month in which it consented to the imposition of the fine and a censure. FINRA signed the letter on Wednesday, agreeing to settle its charges.

Merrill Lynch declined to comment Thursday about the latest matter, which originated from examinations conducted by FINRA Member Supervision.

The sanctions were disclosed only two days after FINRA agreed to accept Merrill Lynch’s payment of a $1.5 million fine for allegedly violating Municipal Securities Rulemaking Board rules related to short sales of muni securities.

From September 2013 until July 2016, Merrill violated Rule 204 of Regulation SHO and FINRA Rule 2010 by “improperly netting the trading activity of five affiliated” broker-dealer clients “when determining their close-out obligations and claiming pre-fail credit,” FINRA alleged.

Also, from January 2005 until January 2015, Merrill violated Rule 200(f) of Regulation SHO by including securities positions held by the wirehouse’s foreign and non-BD affiliates when calculating the net positions of two independent trading units (also known as aggregation units or AGUs), according to FINRA. That rule requires that, to determine its net position, a broker or dealer shall aggregate all of its positions in a security.

From January 2005 until July 2017, Merrill also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with Rule 200(f) of Regulation SHO, in violation of NASD Rules 3010 and 2110, and FINRA Rules 3110 and 2010, FINRA alleged.

Rule 204(a) of Regulation SHO requires BDs to take action to close out fail-to-deliver positions resulting from short sales in equity securities by either borrowing or buying securities of like kind and quantity by the start of regular trading hours on the settlement day following the settlement date, according to FINRA.

BDs are allowed to reduce their delivery obligations by claiming pre-fail credit for purchase or borrow activity done after the trade date, but prior to the settlement date, as long as certain conditions are met, FINRA noted in the AWC letter.

In a No-Action Letter on Sept. 6, 2013, the SEC’s Division of Trading and Markets staff published regulatory guidance allowing BDs to claim pre-fail credit using the “Multi-day Approach,” by aggregating net purchases done across multiple days leading up to the applicable close-out date, provided the BD could demonstrate on its books and records that it had net purchases for each day and met other certain conditions, according to FINRA.

But from September 2013 through July 2016, when taking action to close out FTDs as required by Rule 204(a), “Merrill misapplied the Multi-day Approach on at least 6,000 occasions when calculating the pre-fail credits and close-out obligations of five separate but affiliated” BD clients, FINRA alleged.

In January 2015, Merrill adjusted its automated processes to ensure the affiliates’ trading positions were excluded from the position calculation for the two AGUs, according to FINRA. “Until then, Merrill did not accurately calculate the net positions of, or assess long and short sales by, the two AGUs,” FINRA alleged.

From January 2005 through July 2017, Merrill also failed to establish and maintain a supervisory system, including written procedures reasonably designed to achieve compliance with the SEC’s Rule 200 (f), according to FINRA.

In January 2015, Merrill “enhanced its supervisory reports to reflect the account within the AGU that the securities position was booked to, and the legal entity to which the securities position belonged,” according to FINRA. “However, Merrill did not amend its [written supervisory procedures] to address Rule 200(f)’s requirement as it relates to the Affiliates until July 2017,” FINRA alleged.

(Pictured: A Merrill Lynch branch office; Image: Shutterstock)

European Compliance Association

European Compliance Association

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