Merrill Penalized by FINRA, Again - Analyst Blog

By Zacks | September 25, 2012 AAA

For the second time in the last few months, Merrill Lynch, Pierce, Fenner & Smith Inc. - a wholly owned subsidiary of Bank of America Corporation (BAC) - has been fined by the Financial Industry Regulatory Authority (FINRA). Merrill will pay $500,000 as penalty for its supervisory failure or missing deadline for filing nearly 650 reports related to the brokers' updates and details regarding customer complaints as well as settlements.

The FINRA stated that such failures occurred between 2005 and 2011. Also, Merrill did not provide proper instructions nor did it supervise its employees who were responsible for tracking and reporting such customer complaints. As a result, these violations went unnoticed for years.

As per the FINRA rules, the brokerage firms are required to provide updated information regarding its brokers including criminal and civil complaints as well as regulatory actions against them along with the customer complaints and settlements. Further, all the required information should be made available within 30 days. In addition, the firms must submit a form while hiring a new broker or when the broker leaves.

In case of Merrill, the FINRA commented that the breaches might have hampered investors' ability to assess the background of some brokers through the FINRA's public disclosure system - BrokerCheck. Further, the violations hindered other brokerage firms' ability to conduct background checks while hiring and lowered the ability of the regulators to review brokers' transfer applications.

Earlier in June, the FINRA had penalized Merrill $2.8 million for supervisory failures related to overcharging nearly 95,000 customers in unnecessary fees and failure to provide certain required trade notices. While imposing the fine, the FINRA stated that from April 2003 to December 2011 Merrill did not have a proper system in place to check whether the customers were charged in accordance to their contracts. This had resulted in $32 million of unwarranted fees charged from the clients.

In the recent months, other Wall Street biggies whose units were penalized by the FINRA for various rule violations include The Goldman Sachs Group, Inc. (GS), Morgan Stanley (MS), UBS AG (UBS), Wells Fargo & Company (WFC) and Citigroup Inc. C).

Though Merrill neither admitted nor denied the charges levied by the FINRA, the penalty will somewhat dent the brokerage firm's goodwill. This is also expected to marginally hamper its financial performance in the near term.

Currently, Bank of America retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long term 'Neutral' recommendation on the stock.
 

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