The Financial Industry Regulatory Authority announced Tuesday it fined Merrill Lynch, Pierce, Fenner & Smith Inc. $1.05 million for failing to provide best execution in certain transactions involving non-convertible preferred securities and for failing to have an adequate supervisory system and written supervisory procedures.
Merrill was also ordered to pay more than $323,000 in restitution, plus interest, to customers.
The trades, were executed on one of Merrills proprietary order management systems, ML BondMarket. FINRA has ordered to Merrill to revise how it supervises its order management system within 30 business days.
According to FINRA, Merrill had programmed faulty pricing logic into ML BondMarket that only incorporated quotations published on the primary listing exchange for that non-convertible preferred security. As a result of the fault pricing logic, Merrill executed 12,259 transactions in non-convertible preferred securities with its customers on ML BondMarket at prices that were inferior to the National Best Bid and Offer.
According to FINRA guidelines, a firm must use reasonable diligence to ensure that the purchase or sale price to the customer is as favorable as possible under current market conditions.
"It is paramount that a broker-dealer's systems are adequately designed to ensure that customers receive fair prices in securities transactions, Thomas Gira, a FINRA executive vice president and head of market regulation, said in a statement. Merrill Lynch lacked the necessary systems and supervision to ensure that it provided customers with the best execution of their non-convertible preferred securities transactions which resulted in many customers receiving inferior prices for more than four years.
FINRA found Merrills supervisory system relating to ML BondMarket was deficient in a number of respects. According to FINRA, Merrill failed to perform any post-execution review of non-convertible preferred transactions executed on the platform to ensure compliance with its best execution obligations. The firm also failed to enhance its supervisory review of non-convertible preferred securities transactions executed on ML BondMarket despite the fact several thousand of such transactions were identified on FINRA's best execution report cards and it had received several inquiry letters from the staff.
Merrill neither admitted nor denied the charges, but consented to FINRA's findings.
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