Finra fines Merrill Lynch for fair pricing and supervisory violations

By Susanna Moon

Chicago, Dec. 16 – The Financial Industry Regulatory Authority said it has fined Merrill Lynch, Pierce, Fenner & Smith Inc. for fair pricing and supervisory violations.

The company has been fined $1.9 million for more than 700 retail customer transactions in distressed securities over a two-year period, according to a Finra press release.

Merrill Lynch also was ordered to pay more than $540,000 in restitution plus interest to affected customers.

Merrill Lynch’s global banking and markets credit trading desk allegedly purchased Motors Liquidation Co. senior notes from retail customers at prices 5.3% to 61.5% below the prevailing market price.

The credit desk, after accumulating smaller lots of Motors Liquidation notes through retail customer transactions, then allegedly sold the Motors Liquidation notes to other broker-dealers within the prevailing market price, the press release said.

Finra contends that, of the 716 retail customer transactions, 510 had markdowns in excess of 10%, resulting in Merrill Lynch purchasing Motors Liquidation notes at prices that were unfair to its retail customers in those instances. The notes were originally issued by General Motors Corp. prior to bankruptcy.

Merrill Lynch lacked “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 Finra release said.

“Specifically, the firm did not conduct post-trade best execution or fair pricing reviews of these transactions, or conduct fair pricing or best execution post-trade reviews of other retail customer trades executed on the credit desk.”

Merrill Lynch was ordered to provide three reports over the next 18 months about the firm’s supervisory system for pricing of retail customer transactions executed by the credit desk.

The company neither admitted nor denied the charges, but consented to the entry of Finra’s findings, the release noted.

“We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-priced or distressed securities,” Thomas Gira, Finra executive vice president and head of market regulation, said in the press release.

“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.”

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