The Financial Industry Regulatory Authority has fined Merrill Lynch Pierce Fenner & Smith Inc. $1.4 million over its failure to formulate a supervisory system and procedures to identify and evaluate extended settlement transactions.
FINRA found that from at least April 2013 through June 2015, Merrill Lynch's customers engaged in extended settlement transactions with notional values of hundreds of millions of dollars across numerous firm product lines. Despite the prevalence of these transactions, Merrill Lynch's supervisory system, including written supervisory procedures, was not reasonably designed to identify and evaluate extended settlement transactions for compliance with margin and net capital rules.
As a result, Merrill Lynch's computation of margin requirements and net capital deductions for numerous extended settlement transactions was inaccurate, resulting in margin rule and net capital violations, as well as inaccurate books, records and regulatory report filings.
Additionally, the regulator found that Merrill Lynch improperly extended hundreds of millions of dollars of margin credit in numerous retail customers' cash accounts. These transactions should only have been permitted in margin accounts, not in customer cash accounts, the regulator said.
Merrill Lynch was aware of deficiencies in its supervisory system by April 2013 but failed to implement any remedial measures until mid-2014, according to the findings. Moreover, the company failed to establish a firmwide supervisory system and written procedures to address extended settlement transactions until mid-2015.
Merrill Lynch's failures to promptly address the deficiencies after it knew about them unreasonably delayed its compliance with FINRA requirements and rules, according to the regulator.
Merrill Lynch did not admit or deny the charges but consented to the entry of FINRA's findings.
