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FINRA Penalizes Merrill $2.4M Over Pricing of GM Notes.

Byline: Janet Levaux

The Financial Industry Regulatory Authority said Tuesday that it fined Bank of America-owned Merrill Lynch (BAC) $1.9 million over issues tied to transactions of distressed securities and ordered the firm to pay over $540,000 in restitution and interest to more than 700 clients.

FINRA found that Merrill Lynch's Global Banking & Markets Credit Trading Desk bought Motors Liquidation Company Senior Notes from retail investor clients at prices that were between 5.3% and 61.5% below the prevailing market price. Of the 716 retail customer transactions, 510 had markdowns in excess of 10%.

The credit desk also sold the MLC Notes to other broker-dealers within the prevailing market price over a two-year period. General Motors Corp. issued the notes prior to its bankruptcy.

"We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-priced or distressed securities," said Thomas Gira, FINRA executive vice president and head of market regulation, in a statement. "Even after factoring in the nature of the market for these types of instruments, the markdowns charged were simply unacceptable, as was Merrill Lynch's failure to conduct post-trade fair pricing or best execution reviews for customer transactions executed on the Credit Desk." FINRA says it also concluded that Merrill Lynch "did not have an adequate supervisory system in place to detect whether the firm's credit desk executed a retail customer transaction at a price consistent with the prevailing market price of that security." The regulatory group adds that the firm did not complete reviews of the trades for best execution and fair pricing. As part of the sanctions, FINRA ordered Merrill Lynch to produce three reports over the next 18 months focusing on "the effectiveness of the firm's supervisory system with respect to the pricing of retail customer transactions executed by the credit desk."

Merrill Lynch, which neither admitted nor denied the charges, consented to the entry of FINRA's findings.

"When we became aware of this issue, we worked with FINRA to identify those limited instances where our clients may not have received an appropriate price. We are making payments to affected clients, have taken appropriate disciplinary action and strengthened our supervision efforts," the firm said in a statement.

"The core of our culture is to serve our clients and deliver service that is in our clients' best interest," it added.

-- Check out: Investors Say No to FINRA's CARDS Plan

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Publication:ThinkAdvisor
Date:Dec 16, 2014
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