Merrill Lynch, Pierce, Fenner & Smith agreed to pay an $825,000 fine as part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From at least February 2017 to the present, external investment managers, financial advisors and clients have entered equity orders into the company’s electronic order systems. The firm performed order validation checks before ultimately routing the orders to a buying center for further handling and/or execution.
One such system, for example, is the Equity Order System (EOS). EOS allows external investment managers to transmit files that can contain up to thousands of orders at a time.
After order records are accepted into the EOS system, Merrill performs validation checks to verify the integrity of order records and individual orders, such as whether all fields were completed, as well as various substantive accuracy, business and regulatory checks (e.g., e.g. validation of security symbol, price and other order terms). Once the validations are completed, the orders are finally sent to a buying center for further handling or execution.
During this period, Merrill’s supervisory system, including its written supervisory procedures, was not reasonably designed to achieve compliance with the requirements of Rule 5310.01 to the extent that Merrill only reviewed the timely execution of orders processed through the company’s electronic ordering systems from the time the Orders were routed to a buying center for further handling or execution and the final execution time.
Merrill did not conduct an oversight review of how long the company’s electronic ordering systems took to process and route orders to a buying center.
By omitting from its supervisory inspections the order processing time of its electronic ordering systems from order receipt to route to a buying center, Merrill failed to reasonably supervise whether it made every effort to execute client tradeable orders it received in full and on time.
Therefore, Merrill violated FINRA and 2010 Rules 3110(a) and (b).
From at least February 2017 through the present, Merrill’s supervisory system, including its written supervisory procedures, was not reasonably designed to achieve compliance with SEC and FINRA recordkeeping requirements to the extent that Merrill did not conduct supervisory inspections to ensure the accuracy of information recorded in the firm’s order memos for retail brokerage equity orders received by the firm electronically.
Therefore, Merrill violated FINRA and 2010 Rules 3110(a) and (b).
In addition to the $825,000 fine, Merrill agreed to a censure.