Merrill Lynch, Pierce, Fenner & Smith Inc. has been fined $6.25 million, with an additional $780,000 to be paid in restitution, after the Financial Industry Regulatory Authority (FINRA) found that the firm inadequately supervised its customers’ use of leverage in their brokerage accounts. Merrill neither admitted nor denied the charges announced on Wednesday, November 30, but consented to the entry of these findings in settling the matter.
During its investigation, FINRA discovered that Merrill failed to adequately supervise their customer’s use of proceeds from loan management accounts (LMAs) between January of 2010 and November of 2014. These accounts are lines of credit which allow Merrill customers to borrow money and use the securities in their brokerage accounts as collateral for the loans.
FINRA discovered that both the Merrill Lynch policy and the terms of the loan agreements prohibited customers from using LMA proceeds to buy certain types of securities, but the firm’s supervisory system and procedures were not reasonably designed to enforce the policy. During that nearly five year period, FINRA found that Merrill brokerage accounts bought hundreds of millions of dollars’ worth of securities within two weeks of receiving LMA proceeds on thousands of occasions. As a result of the FINRA case, Merrill Lynch said that they have strengthened their controls and procedures related to the LMAs.
In addition, FINRA also found that between January of 2010 and July of 2013, the firm lacked adequate procedures and supervisory systems to make sure that transactions involving certain Puerto Rican securities, including closed-end funds and municipal bonds, were suitable.
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