FINRA fines Merrill Lynch $7M: Lacking control in Client Accounts


FINRA fines Merrill Lynch today for insufficient supervision of customers’ usage of leverage on their accounts. What else has been revealed?

1 December, AtoZForex – Today, the Financial Industry Regulatory Authority (FINRA) announced a $6.25 million fine for Merrill Lynch, Pierce, Fenner & Smith Inc. To be more specific, FINRA fines Merrill Lynch for inadequately supervising customers’ use of leverage.

FINRA fines Merrill Lynch

Today, FINRA fines Merrill Lynch for inadequately supervising customers’ usage of leverage in their brokerage accounts. Also, FINRA announces that Merrill Lynch will need to pay around $780,000 as compensation for their actions. Merrill “loan management accounts” (LMAs) are lines of credit allowing firm’s customers to borrow money from an affiliated bank. They do so by using the securities held in their brokerage accounts as collateral.

Recently, FINRA found out that Merrill Lynch lacked adequate supervision system and procedures related to its customers’ usage of proceeds from these LMAs. Furthermore, FINRA revealed that these breaches happened throughout the period from January 2010 until November 2014.

Merrill’s Policy and Terms not in action 

FINRA also found out that Merrill’s policies and terms are not in proper use. Merrill’s policy and terms of non-purpose LMA agreements don’t allow customers to use LMA proceeds to buy many types of securities. However, the company’s supervisory system and procedures don’t reasonably detect or prevent such use.

Furthermore, FINRA discovered that during the same period, Merrill brokerage accounts collectively bought hundreds of millions of dollars of securities. That happened within 14 days after receiving incoming transfers of LMA proceeds. Also, FINRA has found such violation has been happening on thousands of occasions.

What else FINRA revealed about Merrill Lynch?

In a different period of time, which is from January 2010 until July 2013, FINRA found out even more about Merrill Lynch. Specifically, FINRA revealed the company lacked sufficient supervision and procedure to ensure the suitability of transactions in certain Puerto Rican securities. That included municipal bonds and closed-end funds, where customers’ holdings were highly focused on such securities. Also, customers’ holdings were highly leveraged through LMAs or margins.

Moreover, FINRA discovered in the same period that 25 leveraged customers with modest net values and conservative or moderate investment objectives suffered aggregate losses. Additionally, these customers had over 75 percent of their account assets invested in Puerto Rican securities, and they suffered losses of approximately $1.2 million. This loss was a result of liquidating those securities to meet margin calls.

Merrill already compensated some customers and will pay approximately $780,000 as a compensation for the remaining 22 customers. Finally, Merrill did not admit nor denied the charges, but agreed to the entry of FINRA’s findings.

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