FINRA slapped Bank of America's broker-dealer with a $1.05 million fine on Tuesday, saying Merrill Lynch had failed in its responsibility toward customers in transactions involving non-convertible preferred securities.
The regulator's reprimand specifically cited Merrill Lynch’s proprietary order management system, ML BondMarket, saying that Merrill Lynch programmed “faulty pricing logic” into the system. This programming error basically didn't catch smaller exchanges, according to a spokesman for Merrill. But because of the slip, customers in over 12,250 trades failed to take advantage of better quotes, the regulator claimed.
Merrill was also called to the floor on its supervision of the system, with FINRA alleging that Merrill failed to perform post-execution reviews of the transactions made through BondMarket, even though it had received several inquiries from staff.
The firm did not confirm or deny the regulator’s allegations, but agreed to the entry of FINRA’s findings. The programming issue pre-dates Bank of America's acquisition of Merrill Lynch, the Merrill spokesman said, adding the processing issue that has been corrected.
Thomas Gira—head of FINRA’s market regulation division—said Tuesday that it was “paramount” that broker dealers have systems that adequately protect clients and ensure that they receive fair prices in securities transactions.
“Merrill Lynch lacked the necessary systems and supervision to ensure that it provided customers with the best execution of their non-convertible preferred securities transactions which resulted in many customers receiving inferior prices for more than four years," Gira said.
In addition to the $1.05 million fine, FINRA ordered Merrill to pay more than $323,000 in restitution, plus interest, to customers who were impacted by BondMarket’s programming errors. The firm's spokesman says Merrill plans to make these payments in the coming weeks.