While Merrill Lynch Professional Clearing (Merrill Lynch PRO) was fined $3.5m over Regulation SHO violations, its affiliated broker-dealer, Merrill Lynch, Pierce, Fenner & Smith has been ordered to pay $2.5m for failure to establish, maintain and enforce supervisory systems and procedures related to Regulation SHO and other areas.
FINRA executive vice president and Enforcement chief Brad Bennett said: "Firms must ensure that their supervisory systems are designed to address and ensure compliance with Regulation SHO.
"In these cases, each firm’s failure to establish systems and procedures to properly close out its fail-to-deliver positions could have potentially negative market impact, which could harm investors."
Established by the US Securities and Exchange Commission, Regulation SHO is a regulatory framework to govern short sales and prevent abusive naked short selling, and also aims to reduce the number of instances in which sellers fail to timely deliver securities.
Conducted by the Departments of Enforcement and Market Regulation, the investigation found that Merrill Lynch PRO failed to take any action to close out certain fail-to-deliver positions between September 2008 and July 2012.
In addition, the company did not have systems and procedures in place to address the close-out requirements of Regulation SHO for the majority of that period.
Merrill Lynch was found guilty of having inadequate supervisory systems and procedures from September 2008 through March 2011.
FINRA also alleged that the company improperly allocated fail-to-deliver positions to its broker-dealer clients based solely on each client’s short position without regard to which clients caused or contributed to its fail-to-deliver position.
