The Financial Industry Regulatory Authority (FINRA) has imposed a $2.8 million fine against Merrill Lynch, Pierce, Fenner and Smith on systemic OATS reporting violations spanning a period of several years, in addition to a failure to accurately submit required trade reports to the appropriate destination and other related supervisory failures.
The U.S. regulator said during the period of review that Merrill Lynch did not have adequate systems and controls in place to detect and prevent the violations. In addition, FINRA’s latest fine was stipulated on repeated failures in accurately submitting required trade reports to the appropriate FINRA Trade Reporting Facility (TRF).
FINRA alleged that Merrill Lynch’s execution and clearing unit failed to transmit complete order-related events to Order Audit Trail System (OATS), an automated market surveillance program used by the regulator to identify potential violations of trading rules. Moreover, a large part of the transmitted information was deemed inaccurate.
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FINRA regulations require all financial firms to provide applicable order information to OATS following a streamlined process and consistent manner. For a period of nearly five years however, Merrill Lynch failed to transmit a wide spectrum of order-related events to its Alternative Trading System (ATS).
On a related note, the firm encountered a number of separate system errors that caused it to report millions of inaccurate reportable order events to OATS, including inaccurate timestamps and broker-dealer orders reported as customer orders, as well as a failure to report millions of execution reports. FINRA said Merrill Lynch also sent inaccurate data regarding a large number of order-related events for more than three years.
According to FINRA, in reaching the civil settlement with the regulator, Merrill Lynch neither admitted to nor denied wrongdoing, though ultimately consented to the entry of the regulator’s findings.
FINRA also found that the scope of Merrill Lynch’s supervisory system with respect to, among other things, trade reporting, OATS reporting, and books and records, was not reasonably designed.
Highlighting FINRA’s market surveillance program, Thomas Gira, Executive Vice President of FINRA Market Regulation, said: “A critical component of market integrity is the ability of regulators to rely on the accuracy of the information reported by broker-dealers. The failure to report accurate audit trail information adversely affects not only FINRA, but other market participants and the investing public.”