FINRA fines Merrill Lynch
01 December 2014 Washington DC
Image: Shutterstock
The Financial Industry Regulatory Authority (FINRA) has censured and fined Merrill Lynch Professional Clearing Corp $3.5 million for violating Regulation SHO, a Securities and Exchange Commission (SEC) rule that established a regulatory framework to govern short sales and prevent abusive naked short selling.
FINRA also censured and fined its affiliated broker-dealer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, $2.5 million for failing to establish, maintain and enforce supervisory systems and procedures related to Regulation SHO and other areas.
In addition to curtailing naked short selling, FINRA has stated that Regulation SHO also aims to reduce the number of instances in which sellers fail to timely deliver securities.
Regulation SHO requires a firm to ‘close out’ any fail-to-deliver positions by borrowing or purchasing securities of like kind and quantity.
Additionally, the regulation 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.
FINRA found that, from September 2008 through July 2012, Merrill Lynch Professional Clearing Corp 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.
Brad Bennett, FINRA's executive vice president and chief of enforcement, said: "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."
FINRA's investigation was conducted by the Departments of Enforcement and Market Regulation.
FINRA also censured and fined its affiliated broker-dealer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, $2.5 million for failing to establish, maintain and enforce supervisory systems and procedures related to Regulation SHO and other areas.
In addition to curtailing naked short selling, FINRA has stated that Regulation SHO also aims to reduce the number of instances in which sellers fail to timely deliver securities.
Regulation SHO requires a firm to ‘close out’ any fail-to-deliver positions by borrowing or purchasing securities of like kind and quantity.
Additionally, the regulation 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.
FINRA found that, from September 2008 through July 2012, Merrill Lynch Professional Clearing Corp 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.
Brad Bennett, FINRA's executive vice president and chief of enforcement, said: "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."
FINRA's investigation was conducted by the Departments of Enforcement and Market Regulation.
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