FINRA fines Merrill $1 million for best-execution lapses

Tue Apr 16, 2013 7:01pm EDT

The company logo of the Bank of America and Merrill Lynch is displayed at its office in Hong Kong March 8, 2013. REUTERS/Bobby Yip

The company logo of the Bank of America and Merrill Lynch is displayed at its office in Hong Kong March 8, 2013.

Credit: Reuters/Bobby Yip

(Reuters) - A Wall Street regulator on Tuesday said it had fined Bank of America Corp's Merrill Lynch $1 million in a civil action for not getting the best execution price for customer transactions involving non-convertible preferred securities and failing to properly supervise the process.

The Financial Industry Regulatory Authority also ordered Merrill to pay more than $323,000 in restitution to customers affected by the transactions. Merrill, in a settlement with FINRA, neither admitted nor denied the regulator's findings.

A Merrill spokesman said the matter predated Bank of America's 2009 acquisition of Merrill Lynch, adding that a processing error that caused the problem has been corrected.

Merrill said it will compensate affected clients in the coming weeks, he said.

Securities industry rules require brokerages and their advisers to use reasonable diligence to ensure that the purchase or sale price for a customer is as favorable as possible, given market conditions.

According to a regulatory settlement, FINRA's disciplinary case stems from activity involving non-convertible preferred securities between 2006 and 2010. The problems occurred through an in-house system, ML BondMarket, which Merrill used to manage orders and execute customer transactions in non-convertible preferred securities, according to the settlement.

FINRA found that Merrill programmed pricing that was limited to quotes published on the primary listing exchange for the non-convertible preferred securities being traded. There were instances in which better quotes were available on other markets that were not reflected in Merrill's system.

As a result, Merrill executed 12,259 transactions at prices that were not as favorable as possible to customers. The firm also did not review non-convertible preferred transactions executed through the system to verify that it was complying with the industry's best execution obligations, FINRA said.

(This story was refiled after Merrill corrected in fourth paragraph that it will compensate clients, not that it has already compensated them)

(Reporting by Suzanne Barlyn; Editing by Kenneth Barry and Phil Berlowitz)

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