WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Merrill Lynch, Pierce, Fenner & Smith Incorporated $1.9 million for fair pricing and supervisory violations in connection with more than 700 retail customer transactions in distressed securities over a two-year time period. Merrill Lynch was also ordered to pay more than $540,000 in restitution, plus interest, to affected customers.
FINRA found that Merrill Lynch's Global Banking & Markets Credit Trading Desk purchased Motors Liquidation Company Senior Notes (MLC Notes) from retail customers at prices 5.3 percent to 61.5 percent below the prevailing market price. The Credit Desk, after accumulating smaller lots of MLC Notes through retail customer transactions, sold the MLC Notes to other broker-dealers within the prevailing market price. Of the 716 retail customer transactions, 510 had markdowns in excess of 10 percent. As a result, in 716 instances, Merrill Lynch purchased MLC Notes at prices that were not fair to its retail customers. The notes were originally issued by General Motors Corporation prior to its bankruptcy.
FINRA also found that Merrill Lynch did not have an adequate supervisory system in place to detect whether the firm's Credit Desk executed a retail customer transaction at a price consistent with the prevailing market price of that security. Specifically, the firm did not conduct post-trade best execution or fair pricing reviews of these transactions, or conduct fair pricing or best execution post-trade reviews of other retail customer trades executed on the Credit Desk. As part of the sanctions, Merrill Lynch is also ordered to provide three reports over the next 18 months regarding the effectiveness of the firm's supervisory system with respect to the pricing of retail customer transactions executed by the Credit Desk.
Thomas Gira, FINRA Executive Vice President and Head of Market Regulation, said, "We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-priced or distressed securities. Even after factoring in the nature of the market for these types of instruments, the markdowns charged were simply unacceptable, as was Merrill Lynch's failure to conduct post-trade fair pricing or best execution reviews for customer transactions executed on the Credit Desk."
In concluding this settlement, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2013, members of the public used this service to conduct 16.5 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.