The Financial Industry Regulatory Authority (FINRA) has announced that it has censured and fined Merrill Lynch, Pierce, Fenner & Smith Inc. $500,000 for supervisory failures that allowed widespread deficiencies in filing hundreds of required reports, including customer complaints, arbitration claims, and related U4 and U5 filings, and for its failure to file the required reports.
The violations, which went undetected for several years, may have hampered investors' ability to assess the background of certain brokers via BrokerCheck, FINRA's public disclosure program. They also may have compromised firms' ability to conduct background checks when making hiring decisions, reduced the ability of securities regulators to review brokers' transfer applications and hindered FINRA from promptly investigating certain disclosure items.
Brad Bennett, FINRA's Executive Vice President and Chief of Enforcement, said, 'Firms that fail to file important regulatory information in a timely manner can compromise the integrity of CRD and BrokerCheck. In this instance, Merrill Lynch failed to report critical information that regulators and investors rely upon. Without timely and accurate reporting by firms, investors only have part of the picture when researching and making decisions about their brokers'.
Under FINRA rules, when a securities firm hires a broker, it must ensure that information on the broker's registration application (Form U4) is updated and kept current on the Central Registration Depository (CRD) system. The firm is required to update that information whenever reportable events occur, including regulatory actions against the broker, specific customer complaints, settlements involving the broker, and felony charges and convictions. Normally, those updates must be filed within 30 days of the event. Firms also are required to notify FINRA within 30 days of the termination of a registered person's association with a member firm by filing a notice known as Form U5. Firms also must notify FINRA within 30 days of learning that information disclosed on a Form U5 filed for a broker has become inaccurate or is incomplete.
In the Merrill Lynch case, FINRA found that:
• From 2007 to 2011, Merrill Lynch failed to file or timely file more than 650 required reports, including customer complaints and customer settlements.
- From 2005 to 2011, Merrill Lynch failed to report or timely report customer complaints, and related Forms U4 and Forms U5 between 23 percent and 63 percent of the time.
• Merrill Lynch failed to adequately train and supervise personnel responsible for customer complaint tracking and reporting, and did not have systems in place to identify the high volume of customer complaints that were not being acknowledged or reported as required. As a result, Merrill Lynch failed to acknowledge nearly 300 customer complaints in a timely manner.
• Merrill Lynch failed to file or timely file approximately 300 non-NASD/FINRA arbitrations and criminal and civil complaints that it received for approximately three years.
- From July 2007 to June 2009, and again from October 2009 to February 2010, Merrill Lynch failed to make these filings 100 percent of the time.
- From 2007 through 2010, Merrill Lynch failed to file related Forms U4 and U5 between 28 percent and 79 percent of the time.
In concluding the settlement, Merrill neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.
image: © Michael Gray