FINRA fines Merrill for inadequate supervision of leverage in brokerage accounts
Merrill Lynch inadequately supervised the use of leverage in client brokerage accounts, even though the use of credit lines to purchase securities was prohibited under the firm's policies, according to FINRA.
After an inquiry, Merrill was fined $6.25 million for the lack of supervision, FINRA said. The firm also will pay $780,000 in restitution to clients for failing to ensure the suitability of transactions in certain Puerto Rican securities, including municipal bonds and closed end funds. The holdings were highly leveraged through either credit lines or margin, according to FINRA.
A spokesman for Merrill's parent company, Bank of America, said that following an internal review of the firm's loan management accounts, the regulator was contacted about the problem. Merrill "cooperated fully" with FINRA and has strengthened its controls and procedures, said the spokesman, Bill Halldin.
IIn the latest case, a FINRA inquiry found that from January 2010 to November 2014 Merrill lacked adequate supervisory systems and procedures to prevent clients from using loan management accounts to purchase securities. "On thousands of occasions," FINRA said, Merrill brokerage accounts collectively bought hundreds of millions of dollars of securities within 14 days of receiving incoming transfers from the credit lines.
Merrill's supervisory systems and procedures were found to not be reasonably designed to detect or prevent such use, FINRA said.
The regulator separately found that from January 2010 through July 2013, Merrill lacked adequate supervisory systems and procedures regarding the suitability of the Puerto Rican securities transactions. During that time, 25 leveraged clients with modest net worths and conservative or moderate investment objectives had 75% or more of their account assets invested in Puerto Rican securities.
The clients consequently suffered aggregate losses of nearly $1.2 million after liquidating the securities to meet margin calls, FINRA said. Merrill has already begun paying back the affected investors and agreed to pay restitution to 22 clients under a settlement with FINRA, according to the regulator.
In the latest in a series of cases, an arbitration panel has sided with a client against UBS, ordering the wirehouse to pay nearly $1.5 million in damages related to UBS' sale of Puerto Rican bonds and closed-end funds.February 22
The firm suffered another arbitration loss this week to clients seeking damages related to the firm's closed-end funds of Puerto Rico municipal bonds.September 1
UBS has agreed to compensate 34 Puerto Rico-based investors for their losses in investments in their municipal bond closed ended funds.October 15
In settling the matter, Merrill neither admitted nor denied the charges, but consented to the entry of FINRA's findings.