Meyer Wilson

FINRA Fines Merrill Lynch Almost $2 Million for Supervisory Failures and Unfair Pricing

The Financial Industry Regulatory Authority ("FINRA") fined Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch") $1.9 million last week. According to FINRA, in 716 instances, the firm purchased senior notes issued by Motors Liquidation Company ("MLC") from its customers at an unfair price. It also alleged that the firm's supervisory system with respect to the pricing of retail customer transactions was deficient.

The MLC Notes were originally issued by the General Motors Corporation and listed on the New York Stock Exchange. After General Motors filed bankruptcy, the MLC Notes were de-listed from the New York Stock Exchange. After the de-listing, the MLC Notes were highly distressed and required to be executed manually at Merrill Lynch. When customers wanted to sell the MLC Notes, the firm obtained a bid from the firm's credit desk and executed the order when and if the customer accepted the firm's bid.

The problem lay in the bids that the Merrill Lynch customers were provided. FINRA alleged that the bids given to these customers were between 5.3% and 61.5% below the prevailing market price. FINRA alleged that one trader at the credit desk was responsible for executing 640 out of the 716 transactions. Additionally, 510 of the transactions involved markdowns in excess of 10 percent.

FINRA also cited Merrill Lynch for its supervisory violations. During this period, FINRA alleged that Merrill Lynch did not have an adequate supervisory system in place, as it was required to, in order to detect if the firm was executing transactions at a price inconsistent with the prevailing market price of that security. FINRA censured both the firm's written supervisory procedures in place and the execution of those supervisory procedures.

As part of the sanctions, Merrill Lynch is required to provide multiple reports over the next 18 months regarding the effectiveness of the firm's supervisory system with respect to the pricing of retail customer transactions. It also must pay restitution of $541,629 to its customers that were harmed.

You can read a copy of FINRA's Letter of Acceptance, Waiver, and Consent here.


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