On October 4, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine Merrill Lynch a total of $1 million. In an investigation conducted under the supervision of FINRA’s Enforcement Chief Counsel, Susan Light, investigators Brian Vincent and Richard Chin found that Merrill Lynch did not have an adequate supervisory system that would monitor employee accounts and allow them to identify potential broker misconduct.
Merrill Lynch’s supervisory system, as it was functioning before FINRA’s decision, captured employee-opened accounts automatically and a social security number was used by the system as the primary tax identification number. However, if the same SSN was not used as the primary account identification number, the system would not record the account in its database. Under this system, it was the responsibility of the employees to manually enter these accounts into the supervisory system. Therefore, if the employee failed to enter his or her account, the account was not properly monitored.
Because of the discrepancies in Merrill Lynch’s supervisory practices, there was an instance of stock broker fraud committed in San Antonio, Texas, in which an employee’s account was used. In December 2009, Bruce Hammonds was barred from the securities industry for convincing 11 individuals to invest in a Ponzi scheme. The scheme lasted 10 months, during which Merrill Lynch’s failure to supervise the account it had approved allowed him to collect investments totaling over $1 million from the 11 investors. In addition to the Ponzi scheme, the lacking supervisory system failed to properly monitor 40,000 employee/employee-interested accounts between January 2006 and June 2010.
Of the ruling, FINRA’s Executive Vice President and Chief of Enforcement, Brad Bennett, said, “Firms must ensure their supervisory systems are designed to properly monitor employee accounts for potential misconduct.” Merrill Lynch did not admit nor deny charges but consented to FINRA’s findings.