FINRA has fined Merrill Lynch, Pierce, Fenner & Smith Incorporated $1.9 million for fair pricing and supervisory violations in connection with more than 700 retail customer transactions in distressed securities over a two-year time period. Merrill Lynch was also ordered to pay more than $540,000 in restitution, plus interest, to affected customers.
It was found that Merrill Lynch’s Global Banking & Markets Credit Trading Desk purchased Motors Liquidation Company Senior Notes (MLC Notes) from retail customers at prices 5.3 percent to 61.5 percent below the prevailing market price. As a result, in 716 instances, Merrill Lynch purchased MLC Notes at prices that were not fair to its retail customers. The notes were originally issued by General Motors Corporation prior to its bankruptcy. Also, Merrill Lynch did not have an acceptable supervisory system in place and specifically, 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.
Thomas Gira, FINRA Executive Vice President and Head of Market Regulation, said, “We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-priced or distressed securities. 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.”
Merrill Lynch has been ordered to deliver three reports over the next 18 months regarding the effectiveness of the firm’s supervisory system with respect to the pricing of retail customer transactions executed by the Credit Desk, as part of the sanctions.