More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The Financial Industry Regulatory Authority said Tuesday that it fined Merrill Lynch $1 million for supervisory failures that allowed a financial advisor at a branch in San Antonio to use a Merrill account to operate a Ponzi scheme.
According to FINRA, ex-advisor Bruce Hammonds convinced 11 individuals to invest more than $1 million in a Ponzi scheme he created and ran as B&J Partnership for over 10 months in San Antonio, according to FINRA. “Merrill Lynch supervisors approved Hammonds' request to open a business account for B&J and failed to supervise funds that customers deposited and Hammonds withdrew,” the independent regulatory group said in a press release.
"Firms must ensure their supervisory systems are designed to properly monitor employee accounts for potential misconduct,” said Brad Bennett, FINRA executive vice president and chief of enforcement. “Merrill Lynch's inadequate supervisory system and the firm's excessive reliance on employee self-reporting enabled Hammonds to facilitate his Ponzi scheme to the detriment of investors."
FINRA permanently barred Hammonds from the securities industry in December 2009, and Merrill Lynch reimbursed all investors who were harmed by Hammond's misconduct, the group says. It also found that Merrill Lynch “failed to have an adequate supervisory system in place to monitor employee accounts for potential misconduct,” according to a press release.
“Merrill Lynch's supervisory system automatically captured accounts an employee opened using a Social Security number as the primary tax identification number. However, if the employee's Social Security number was not the primary number associated with the account, the system failed to capture the account in its database,” FINRA shared in a press release.
In these cases, “Merrill Lynch solely relied on its employees to manually input these accounts into its supervisory system,” explained the group. “FINRA also found that from January 2006 to June 2010, Merrill Lynch failed to monitor an additional 40,000 employee/employee-interested accounts, which were not reported for certain periods of time and therefore not available on the supervisory system.”
For its part, Merrill Lynch–which has about 16,240 advisors–said it “cooperated fully with all investigations in this matter. The firm detected the irregularities with the accounts, terminated Mr. Hammonds, alerted the authorities and compensated affected clients,” it said in a statement. “We have extensive monitoring in place today and continually take steps to enhance our monitoring systems.”