Merrill Lynch, Pierce, Fenner & Smith Inc. of New York, New York, was censured and fined $1,250,000 after consenting to findings of the firm’s failure to fingerprint or timely fingerprint associated persons; failure to adequately screen for statutory disqualification; failure to create required documents; and failure to establish and maintain an adequate supervisory system and failure to establish, maintain and enforce written supervisory procedures. Letter of Acceptance, Waiver and Consent, No. 2013038772501 (Dec. 16, 2015).
According to the AWC, from January 1, 2009 through October 28, 2013, the firm had failed to conduct adequate background checks on an estimated 4,500 of its 20,000 non-registered associated persons. Of the 4,500 individuals, 1,115 were not actually fingerprinted at all and another 240 were not fingerprinted until after they began to work for Merrill. Merrill Lynch reportedly fingerprinted the remaining 3,145 associated persons and screened them under Section 19 of the Federal Insurance Deposit Act (Section 19), but had failed to screen them for certain felony convictions or regulatory actions as required by the Securities Exchange Act of 1934. Consequently, according to the AWC, the firm had allowed at least one person who was subject to a disqualification to associate with it and was not able to determine whether another 115 individuals were subject to disqualification because they were terminated prior to the firm screening them.
The AWC reported that the firm’s failure to fingerprint or properly screen the 4,500 associated persons during the relevant time period arose, in part, from the firm’s January 1, 2009 acquisition by Bank of America Corporation. After Bank of America had acquired Merrill Lynch, Merrill Lynch failed to maintain any supervisory system or procedures which identified and properly screened all individuals associated with the firm in a non-registered capacity. Consequently, FINRA found that Merrill Lynch violated Section 17(f) of the Exchange Act and Rule 17f-2, FINRA By-Laws, Article III, Section 3(b), NASD Rule 3010, and FINRA Rule 2010. FINRA also found that Merrill failed to maintain certain records in violation of Section 17(a) of the Exchange Act and Rule 17a-3, NASD Rule 3110, and FINRA Rules 4511 and 2010.
This is not the first time that Merrill Lynch has been disciplined for similar misconduct. On June 29, 2000, a New York Stock Exchange Hearing Panel fined the firm $250,000 after finding that the firm had associated with three persons subject to statutory disqualification for three, six, and eight months, respectively. NYSE Decision No. 00-109 (June 29, 2000). Additionally, on November 15, 20002, NYSE fined the firm $300,000 after finding that Merrill associated with twenty-three individuals who were subject to statutory disqualification and failed to report the associations pursuant to NYSE Rule 351. NYSE Decision No. 02-228 (Nov. 15, 2002).
Federal securities laws require that FINRA member firms fingerprint most associated persons prior to or upon association with the firm. The firms, according to FINRA, review the fingerprint results as part of their background check to determine, among other things, whether a prospective associated person has previously engaged in misconduct (e.g. certain criminal and regulatory events) which subjects her or him to statutory disqualification.
Securities brokerage firms have a duty to supervise their brokers and the sales practices of their brokers, and to review customer statements for, among other things, evidence of suitability, unauthorized trading, or excessive activity. FINRA Conduct Rule 3010 specifically provides that each member shall establish and maintain a system to supervise the activities of each stockbroker and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules.
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