FINRA has fined Merrill Lynch $2.8 million for a series of system failures that produced millions of inaccurate trading records over the course of several years, according to the regulator.
Staffers at FINRA's Department of Market Regulation identified a number of reporting errors in the data Merrill submitted to FINRA's Order Audit Trail System, or OATS, and cited the firm for failures relating to its supervision practices and its maintenance of books and records.
In a statement announcing the settlement, Thomas Gira, executive vice president and head of market regulation at FINRA, notes the importance of maintaining accurate data through the OATS market-surveillance program to detect signs of market manipulation and other irregularities.
"A critical component of market integrity is the ability of regulators to rely on the accuracy of the information reported by broker-dealers," Gira says. "The failure to report accurate audit trail information adversely affects not only FINRA, but other market participants and the investing public."
Bill Halldin, a spokesman for Merrill Lynch, offered a brief statement on the settlement, but declined to comment further.
"We have been working with regulators to improve our processes and systems to address these issues," Halldin says.
Merrill settled the case without admitting or denying the charges, but accepted the entry of FINRA's findings into its disciplinary record, according to the regulator.
In addition to reporting millions of trades that it was not required to submit, Merrill Lynch erroneously entered millions of inaccurately identified trades into the FINRA/NASDAQ Trade Reporting Facility, according to FINRA's letter of acceptance, waiver and consent. As a result of that errant reporting, purchases were submitted as principal sales or agency crosses, transactions in which the adviser operates as the broker for both the buyer and seller.
Additionally, FINRA's letter notes a number of other technical failures, including the placement of inaccurate cancel stamps on orders and the submission of millions of broker-dealer orders that were reported as customer orders. FINRA also says that Merrill failed to submit millions of execution reports to its OATS program.
The regulator also cites Merrill Lynch for failing to maintain accurate books and records, specifically dinging the firm for not capturing minimum quantity instructions for millions of orders, and concluding that its written supervisory procedures "were not reasonably designed to ensure compliance" with FINRA's rules.
"Given the volume of the firm's OATS reporting obligations, the scope of the firm's WSPs was not reasonably designed to capture and identify any reporting problems," FINRA says in its letter.
In their review of Merrill's practices, FINRA staffers determined that a system configuration error accounted for the inaccurate reporting of more than 20 million trades from May 2010 to April 2014. Then, from January 2011 through late 2015, Merrill was found to have committed a number of OATS violations, including one particular desk that did not report its execution orders and timestamp inaccuracies stemming from the firm's OATS vendor.
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