Wednesday, April 17, 2013

FINRA Fines Merrill Lynch for Failing to Provide Best Execution to Customers

By Tim Dulaney, PhD and Tim Husson, PhD

FINRA announced yesterday that it has fined Merrill Lynch more than one million dollars "for failing to provide best execution in certain customer transactions involving non-convertible preferred securities executed on one of its proprietary order management systems (ML BondMarket)" as well as inadequate supervision.

FINRA's Department of Market Regulation found what amounts to a systematic issue in the ML BondMarket software that prevented customer orders from being evaluated at the most favorable price.  The software only considered the price quotations published on the primary exchange for non-convertible preferred securities, effectively ignoring any better quotations from other exchanges.  FINRA identified over 12,000 transactions between 2006 and 2010 in which users of the ML BondMarket system were harmed by this issue.  The customers involved in these transactions lost almost $325,000 as a result of the programming problem and Merrill Lynch has been ordered to repay this amount plus interest.

FINRA notes that Merrill Lynch failed to "perform any post-execution review of non-convertible preferred transactions" conducted on the automated ML BondMarket software.  FINRA fined Merrill Lynch $650,000 for best execution violations and $400,000 for supervision violations.  Merrill Lynch's neither admitted or denied the findings (PDF) but accepted the fine to settle the matter.

A representative of Bank of America noted that this "matter, which pre-dated Bank of America’s acquisition of Merrill Lynch, was caused by a processing issue that has been corrected".  It is unclear how much weight such statements will have on restoring confidence in the ML BondMarket software.

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