Merrill Lynch, Pierce, Fenner & Smith has agreed to pay a fine of $825,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From at least February 2017 through the present, external investment managers, financial advisers, and customers entered equity orders into the firm’s electronic order systems. The firm performed validation checks on the orders before ultimately routing the orders to a market 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 the order files are accepted into the EOS system, Merrill performs validation checks to verify the integrity of the order files and individual orders, such as whether all fields were populated, as well as various substantive accuracy, business, and regulatory checks (e.g., validating the security symbol, price and other order terms). Once the validations are completed, the orders are ultimately sent to a market 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 in so far as Merrill only reviewed the execution timeliness of orders processed through the firm’s electronic order systems from the time the orders were routed to a market center for further handling or execution and the final execution time.
Merrill did not conduct a supervisory review of how long it took the firm’s electronic order systems to process and route the orders to a market center.
By omitting from its supervisory reviews the electronic order systems’ order handling time from order receipt to the route time to a market center, Merrill failed to reasonably supervise whether it made every effort to execute marketable customer orders that it received fully and promptly.
Therefore, Merrill violated FINRA Rules 3110(a) and (b) and 2010.
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 in so far as Merrill did not conduct supervisory reviews to ensure the accuracy of information recorded on the firm’s order memoranda for retail brokerage equity orders the firm received electronically.
Therefore, Merrill violated FINRA Rules 3110(a) and (b) and 2010.
On top of the $825,000 fine, Merrill has agreed to a censure.
