Bank of America and Merrill Lynch Settle with FINRA for Supervisory Failures
From the desk of Jim Eccleston at Eccleston Law
Bank of America and its subsidiary, Merrill Lynch, have agreed to a $3 million fine and censure as part of a settlement with FINRA over long-term supervisory failures. These failures, which occurred from 2015 to 2019, involved inadequate monitoring of potentially manipulative trading activities by their customers.
According to FINRA, both Merrill Lynch and Bank of America Securities, the institutional broker-dealer arm, relied on third-party surveillance systems to detect market manipulation tactics, such as wash trading and prearranged trading. However, the parameters of these systems were "too narrow" and failed to properly flag suspicious activities. InvestmentNews reports that the firms did not take sufficient steps to evaluate whether the surveillance modules were effective or if additional monitoring was necessary.
In addition, due to a coding error, Merrill Lynch's surveillance systems failed to monitor over-the-counter (OTC) securities and warrants trading for potential manipulation. According to InvestmentNews, the oversight went undetected from 2016 until January 2019, allowing potentially problematic trades to go unchecked.
Between 2017 and 2018, Merrill Lynch further neglected to detect manipulative trades in OTC securities due to a failure to purchase the necessary data feed from its third-party vendor. As a result, both firms missed hundreds of alerts for approximately 700 potentially manipulative equity trades and 125,000 options trades.
The issue came to light in August 2020, following a regulatory inquiry. Internal testing had previously identified several red flags, which the firms failed to address.
FINRA found the firms in violation of Rule 3011, which requires firms to implement reasonably designed supervisory systems, and Rule 2010, which mandates that firms maintain high standards of commercial honor. Merrill Lynch and Bank of America neither admitted nor denied the findings. Of the $3 million fine, $699,000 will go to FINRA, while the remainder will be distributed to exchanges such as the NYSE and Nasdaq.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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