Restitution Also Paid to 22 Customers Who Were Highly Concentrated and Highly Leveraged in Puerto Rican Securities
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Merrill Lynch, Pierce, Fenner & Smith Inc. $6.25 million and the firm will pay approximately $780,000 in restitution for inadequately supervising its customers’ use of leverage in their Merrill brokerage accounts.
Merrill “loan management accounts” (LMAs) are lines of credit that allow the firm’s customers to borrow money from an affiliated bank using the securities held in their brokerage accounts as collateral. FINRA found that from January 2010 through November 2014, Merrill lacked adequate supervisory systems and procedures regarding its customers’ use of proceeds from these LMAs. More specifically, FINRA found that although both Merrill policy and the terms of the non-purpose LMA agreements prohibited customers from using LMA proceeds to buy many types of securities, the firm’s supervisory systems and procedures were not reasonably designed to detect or prevent such use. FINRA further found that during the relevant period, on thousands of occasions, Merrill brokerage accounts collectively bought hundreds of millions of dollars of securities within 14 days after receiving incoming transfers of LMA proceeds.
FINRA separately found that from January 2010 through July 2013, Merrill lacked adequate supervisory systems and procedures to ensure the suitability of transactions in certain Puerto Rican securities, including municipal bonds and closed-end funds, where customers’ holdings were highly concentrated in such securities and highly leveraged through either LMAs or margin. FINRA further found that during the relevant period, 25 leveraged customers with modest net worths and conservative or moderate investment objectives, and with 75 percent or more of their account assets invested in Puerto Rican securities, suffered aggregate losses of nearly $1.2 million as a result of liquidating those securities to meet margin calls. Merrill has already reimbursed some customers and, as part of the settlement, will pay approximately $780,000 in restitution to the remaining 22 customers affected.
In settling this matter, Merrill neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2015, members of the public used this service to conduct 71 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database. Investors can also call FINRA's Securities Helpline for Seniors at (844) 57-HELPS for assistance or to raise concerns about issues they have with their brokerage accounts and investments.
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