Merrill Lynch Fined $6 Million for Short Sale Violations and Supervisory Failures

Attorney Advising Disclaimer

FINRA fined Merrill Lynch Professional Clearing Corp. $3.5 million for violating SEC rules regarding short sales and affiliated broker-dealer Merrill Lynch, Pierce, Fenner & Smith Incorporated $2.5 million for supervisory system deficiencies.

FINRA Case #20100229712

According to FINRA's investigation, Merrill Lynch repeatedly failed to timely close out fail-to-deliver short sale positions and, in doing so, violated SEC Regulation SHO, which was designed to prevent abusive short selling practices while aiming to reduce the likelihood of a seller failing to timely deliver securities.

The report states that Merrill Lynch's misconduct stemmed in part from the fact that the firm failed to timely deliver by borrowing or purchasing securities of like kind and quantity to fail-to-deliver short sale positions.

Investigators concluded that Merrill Lynch's inadequate supervisory systems and procedures permitted the firm to allocate fail-to-deliver positions based solely on each client's short position without regard to fail-to-deliver contributory factors.

During the relevant period from 2008 through 2011, Merrill Lynch's alleged procedural deficiencies resulted in a "significant number" of improper allocations and "hundreds of thousands" of executed shares in violation of industry rules and orders.

Merrill Lynch's failures extended to an inaccurate reserve calculation, which the Exchange Act requires of broker-dealers. According to this rule, firms must perform a weekly computation to determine what it must deposit on behalf of investors. Because this calculation is performed on a weekly basis, untimely, inaccurate or erroneous filings, as could result from a failure to timely close out or deliver short sales, may contribute to an inaccurate reserve formula computation.

FINRA found that Merrill Lynch submitted six inaccurate FOCUS reports related to these reserve formula computations.

According to FINRA, the firm's failure to comply with industry rules not only extended to timely notification failures, but to inadequate pre-execution controls, deficient post-trade reviews, lack of written policies and procedures and violations of FINRA/NASD anti-money laundering provisions designed to monitor suspicious activity. These violations ultimately resulted in one final charge, a failure to maintain accurate books and records.

In 2012, Merrill Lynch entered into a stipulation of facts and consent to penalty with NYSE Amex LLC, agreeing that it violated Regulation SHO by failing to close out 22 fail-to-deliver positions in 4 separate securities. For that prior violation, Merrill Lynch received a $50,000 fine.

If you have invested with Merrill Lynch or with any other brokerage or investment firm whose failure to timely close out fail-to-deliver short sales or whose other policy or procedure deficiencies resulted in inaccurate or erroneous transactions that have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.

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