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Regulation and Compliance > Federal Regulation > FINRA

Merrill to Pay $1.5M FINRA Fine Over Muni Shorts

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What You Need to Know

  • The firm failed to notify investors in munis that they were receiving substitute interest payments that were not tax-exempt, FINRA says.
  • The wirehouse has already implemented enhancements to its supervisory system and procedures, according to Merrill.

The Financial Industry Regulatory Authority hit Merrill Lynch with a $1.5 million fine for allegedly violating Municipal Securities Rulemaking Board rules.

Without admitting or denying FINRA’s findings, the firm signed a FINRA letter of acceptance, waiver and consent last month in which it consented to the imposition of the fine and a censure. FINRA signed the letter Monday.

“We have implemented enhancements to our supervisory system and procedures,” a Merrill spokesman told ThinkAdvisor on Tuesday.

From February 2015 through June 2021, Merrill violated MSRB Rule G-27 by “failing to establish and maintain a supervisory system, including written procedures, reasonably designed to address short positions in municipal securities and their effects on customers who hold them,” according to FINRA.

“By failing to take prompt steps to bring short positions in municipal securities within its control within 30 days, Merrill also violated Exchange Act Rule 15c3-3(d)(4) and FINRA Rule 2010, FINRA alleged.

Additionally, “by failing to provide its customers with notice clearly identifying their receipt of substitute interest payments, and the potential tax liability resulting from these payments, Merrill violated MSRB Rule G-17 during the same time period.”

As FINRA explains, firms may short muni securities held in customer accounts. “When this occurs, the firm is the source of the interest payments to the customers,” according to the regulator. “This ‘substitute’ interest is not tax-exempt. As a result, customers are deprived of the favorable tax status associated with their municipal security investments and exposed to potential tax liability.”

Of the $1.5 million fine imposed on Merrill by FINRA, $1 million pertains to the violations of MSRB Rules G-17 and G-27.

As part of the settlement, Merrill also agreed to submit, within 180 days of the issuance of the Notice of Acceptance of the AWC letter, a certification in writing by one or more principals and officers of the firm with supervisory authority over the areas described in the AWC.

Among the promises that it must include is that Merrill’s supervisory systems and written procedures are reasonably designed to achieve compliance with MSRB Rules G-17 and G-27 and Exchange Act Rule 15c3-3(d)(4) in connection with the matters described in the AWC letter, according to FINRA.

(Pictured: A Merrill Lynch branch office; credit: Shutterstock)


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