[ by Howard Haykin ]

Customer Complaints, Arbitrations, Litigations Backlogged For Years.

Merrill Lynch, Pierce, Fenner & Smith Inc. agreed to settle FINRA charges that supervisory failures had allowed widespread deficiencies in filing hundreds of required reports, including customer complaints, arbitration claims, and related Form U4 and U5 filings.  The $500,000 sanction also covered the firm's failure to actually file the required reports. 

Profile of Merrill Lynch. Merrill Lynch, a member of FINRA and the NYSE since January 1937 and November 1982, respectively, has its principal place of business in New York.  The Firm is a global investment banking and multi-service brokerage firm that, among other things, provides retail brokerage, corporate and investment banking services, wealth management and commercial lending.

As 1/1/12, Merrill maintained over 1,800 branch offices and employed more than 15,000 registered individuals.  In January 2009, its parent company, Merrill Lynch & Co., was acquired by Bank of America Corporation and merged with one of its wholly-owned subsidiaries.  In October 2009, Banc of America Investment Services, Inc. was consolidated into the Firm.

As of November 2011, the Firm had a net capital of approximately of $11 billion and an excess net capital in excess of $10 billion. 

FINRA Findings and Allegations. From in or about 2005 to August 2011 the Firm allegedly failed to make or timely make approximately I,200 required filings or acknowledgments of customer complaints, certain arbitrations and civil litigations and related Forms U-4 and Forms U-5.  The violations went undetected for several years.

FINRA notes that such failures could hamper investors' ability to assess the backgrounds of certain brokers via FINRA's BrokerCheck, and they also could compromise a firms' ability to conduct background checks when making hiring decisions, and could reduce the ability of regulators to review brokers' transfer applications, while hindering FINRA from promptly investigating certain disclosure items.

Brad Bennett, FINRA EVP and Chief of Enforcement, had this to say: "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."

Required Procedures. Under FINRA rules, when a securities firm hires a broker, it must update that broker's registration application (Form U4), then keep it current on the CRD)\ system. Firms have 30 days to update the CRD for "reportable events," that include: (i) regulatory actions against the broker; (ii) specific customer complaints; (iii) settlements involving the broker; and, (iv) felony charges and convictions.

Firms also have 30 days to notify FINRA when a registered person's association with that firm has terminated (Form U5), and 30 days to inform FINRA upon learning that information disclosed on a Form U5 filed for a broker has become inaccurate or is incomplete.

Specific Exceptions Found by FINRA. In the Merrill Lynch case, FINRA found that:

• From 2007 to 2011, Merrill failed to file or timely file > 650 required reports, including customer complaints and customer settlements.

• From 2005 to 2011, Merrill failed, between 23% to 63% of the time, to either file or to file in a timely manner reportable customer complaints and update brokers' related Forms U4 and U5.  

• Lapses in complaint-tracking and reporting caused Merrill to fail to acknowledge nearly 300 customer complaints in a timely manner.  FINRA found that personnel responsible for tracking and reporting customer complaints were neither adequately trained nor supervised.  Further, the firm did not have systems in place to identify the high volume of customer complaints that went unacknowledged or unreported as required - i.e., exception reports.

• Over a 3-year period, Merrill Lynch failed to file or timely file approximately 300 non-NASD/FINRA arbitrations and criminal and civil complaints that it had received.

• From July 2007 to June 2009, and again from October 2009 to February 2010, Merrill Lynch failed to make these filings 100% of the time.
• From 2007 through 2010, Merrill failed to file related Forms U4 and U5 between 28% and 79% of the time.

FINRA Staff Credits. Investigation by: Josefina Martinez and Elizabeth DaSilva; supervised by Susan Light and Richard Chin.

For further details, go to:   [FINRA News Release, 9/24/12]   and   [FINRA AWC #20090203563 - ML, Pierce, Fenner & Smith, Inc.]