FINRA fines Merrill $7M for inadequate supervision of securities-backed leverage
The Financial Industry Regulatory Authority said that it has fined Merrill Lynch, Pierce, Fenner & Smith Inc. $6.25M and the firm will pay approximately $780,000 in restitution for inadequately supervising its customers' use of leverage in their Merrill brokerage accounts. FINRA found that although both Merrill policy and the terms of the non-purpose LMA agreements prohibited customers from using LMA proceeds to buy many types of securities, the firm's supervisory systems and procedures were not reasonably designed to detect or prevent such use. FINRA further found that during the relevant period, on thousands of occasions, Merrill brokerage accounts collectively bought hundreds of millions of dollars of securities within 14 days after receiving incoming transfers of LMA proceeds. FINRA separately found that from January 2010 through July 2013, Merrill lacked adequate supervisory systems and procedures to ensure the suitability of transactions in certain Puerto Rican securities, including municipal bonds and closed-end funds, where customers' holdings were highly concentrated in such securities and highly leveraged through either LMAs or margin. In settling this matter, Merrill neither admitted nor denied the charges, but consented to the entry of FINRA's findings.