Merrill Lynch and BofA Securities Fined $3 Million for Supervisory Lapses Related to Manipulative Trading Activities
The Financial Industry Regulatory Authority has fined Merrill Lynch, Pierce, Fenner & Smith Incorporated, and BofA Securities Inc. (collectively referred to as BAML) $3 million for failure to maintain adequate supervisory systems to detect and prevent potentially manipulative trading activities by their customers.
According to FINRA, from December 2015 through the present, BAML relied on a number of third-party automated surveillance systems that were not reasonably designed to identify potentially manipulative trading practices such as wash trading and prearranged trading. FINRA stated that the parameters set within these systems were too narrow, leading to potential violations slipping through the cracks. Additionally, BAML did not take adequate steps to determine whether these parameters were reasonable or whether changes needed to be made. FINRA also claimed that at certain times during the relevant time period, Merrill excluded from its surveillances trading in OTC securities and warrants. Finally, the firm failed to review alerts generated by multiple surveillance patterns in equities and options.
Wash trading, in essence, involves creating a false impression of market activity by simultaneously buying and selling the same security. Prearranged trading refers to coordinating trades between parties to influence market prices artificially. Both practices are prohibited as they can distort market integrity and harm investors.
As a result of these lapses, BAML violated FINRA Rule 3110 which “requires each member to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.” A violation of Rule 3110 is also a violation of Rule 2010 which requires members to “observe high standards of commercial honor.”
Without admitting or denying the allegations, BAML agreed to a censure and a $3 million fine, $669,000 of which will be paid to FINRA. The remainder will be paid to various exchanges.
BofA Securities is a full-service broker-dealer providing a range of financial services, including sales and trading, market making, investment banking, and underwriting. The firm is headquartered in New York City and has approximately 5,350 registered representatives, with approximately 140 branch offices. BofA Securities became a FINRA member in January 2018.
Merrill Lynch is a global investment banking and multi-service brokerage firm that provides, among other things, retail brokerage and wealth management services. Since January 2009, Merrill Lynch has been an indirect, wholly owned subsidiary of Bank of America Corporation with its principal place of business in New York City. It has more than 28,000 registered representatives in more than 4,000 branch offices, servicing tens of millions of customers.
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