The Financial Industry Regulatory Authority announced Monday that it has censured and fined two divisions of Merrill Lynch — Merrill Lynch Professional Clearing Corp. and its affiliated broker-dealer, Merrill Lynch, Pierce, Fenner & Smith Inc. — a total of $6 million for Regulation SHO violations and supervisory failures.
Merrill’s Professional Clearing Corp. must pay $3.5 million for violating Regulation SHO, a Securities and Exchange Commission rule that established a regulatory framework to govern short sales and prevent abusive naked short selling, while Merrill Lynch, Pierce, Fenner & Smith Inc. must pay $2.5 million for failing to establish, maintain and enforce supervisory systems and procedures related to Regulation SHO and other areas.
Regulation SHO is also designed to reduce the number of instances in which sellers fail to timely deliver securities, FINRA explains, and requires a firm to timely “close out” any fail-to-deliver positions by borrowing or purchasing securities of like kind and quantity.
Reg SHO also permits firms to reasonably allocate fail-to-deliver positions to its broker-dealer clients that caused or contributed to the firm’s fail-to-deliver position.
Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said in a statement that ”firms must ensure that their supervisory systems are designed to address and ensure compliance with Regulation SHO. In these cases, each firm’s failure to establish systems and procedures to properly close out its fail-to-deliver positions could have potentially negative market impact, which could harm investors.”
A Merrill spokesperson told ThinkAdvisor that the censures and fines involve Merrill’s “business that clears trades for market makers,” not Merrill’s wealth management business.
Merrill said in a statement that “We are pleased to resolve this matter. We take very seriously our obligations and have improved our procedures to address issues identified by FINRA.”
FINRA found that from September 2008 through July 2012, Merrill Lynch PRO did not take any action to close out certain fail-to-deliver positions, and did not have systems and procedures in place to address the close-out requirements of Regulation SHO for the majority of that period.
FINRA also found that from September 2008 through March 2011, Merrill Lynch’s supervisory systems and procedures were inadequate and improperly permitted the firm to allocate fail-to-deliver positions to the firm’s broker-dealer clients based solely on each client’s short position without regard to which clients caused or contributed to Merrill Lynch’s fail-to-deliver position.
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