NASD Regulation Fines Merrill Lynch, Pierce, Fenner & Smith, Inc. $97,000 for Limit Order, Best Execution, and Other Violations
Washington, D.C.—NASD Regulation, Inc., announced today that it has censured and fined Merrill Lynch, Pierce, Fenner & Smith, Inc., $97,000 for rule violations that were discovered by NASD Regulation’s Market Regulation Department through a combination of its automated surveillance systems and the onsite examination program. NASD Regulation determined that, from November 1997 to December 1999, Merrill Lynch on occasion violated the Securities and Exchange Commission (SEC) Limit Order Display Rule, as well as NASD rules pertaining to best execution, short sales, locked and crossed markets, and trade reporting. NASD Regulation also found that Merrill Lynch failed to have a reasonably designed supervisory system in place with respect to the correct reporting of short sales to the Automated Confirmation Transaction ServiceSM (ACTSM) and in 1997, with respect to best execution, the SEC Order Handling Rules, and ACT compliance. In settling this matter, Merrill Lynch neither admitted nor denied NASD Regulation’s findings.
In its review, NASD Regulation found that Merrill Lynch failed to comply with the SEC Limit Order Display Rule in connection with 41 customer limit orders. Customers place limit orders to trade securities at a specific price. The SEC Limit Order Display Rule requires the immediate display of customer limit order prices, if they improve on the market maker’s quotation. The Market Regulation Department also found that between 1997 and 1999 Merrill Lynch failed to provide best execution for 70 customer orders, and under NASD rules for best execution, members must execute customer orders at prices that are as favorable as possible under prevailing market conditions.
In another area, the NASD Regulation probe found that Merrill Lynch failed to comply with the NASD’s rule for locked and crossed markets. A locked market occurs when the inside bid price equals the inside offer price in the same security, and a crossed market occurs when the inside bid is greater than the inside offer price of a security. NASD rules require that, before entering a quote during the trading day that will lock or cross the market in a Nasdaq security, a market maker must make reasonable efforts to avoid such a locked or crossed market by executing transactions with all market makers whose quotations would be locked or crossed. According to its review, the Market Regulation Department found that, in 73 instances, Merrill Lynch did not make reasonable efforts to avoid locked and crossed markets.
The NASD Regulation Market Regulation Department also determined that Merrill Lynch engaged in a pattern of late transaction reporting into the ACT system without exceptional circumstances. The ACT system is a Nasdaq system that members use to report transactions and assist in the clearance of transactions. Further, the NASD Regulation review found that the firm’s supervisory system to ensure the correct reporting of short sales to ACT was inadequate.
In settling the matter, NASD Regulation took note that Merrill Lynch has taken steps to develop and implement highly automated systems to address best execution and short sale issues.
In the past two years, NASD Regulation has brought approximately 60 cases for limit order display violations. Today’s action was brought by NASD Regulation’s Market Regulation Department. The Market Regulation Department’s Trading and Market Making Surveillance Examination Program (TMMS), Short Sale Compliance Section, and Trading Practices Section conducted the reviews which led to the initiation of this disciplinary action.
Investors can obtain the disciplinary record of any NASD-registered broker or brokerage firm by calling (800) 289-9999, or by sending an e-mail through NASD Regulation’s Web site www.nasdr.com. For more information on NASD Regulation, visit the Web site.
NASD Regulation oversees all U.S. stockbrokers and brokerage firms. NASD Regulation, The Nasdaq Stock Market, Inc.®, The American Stock Exchange®, and NASD Dispute Resolution, Inc. are subsidiaries of the National Association of Securities Dealers, Inc. (NASD®), the largest securities-industry self-regulatory organization in the United States.