FINRA Orders Merrill Lynch to Pay $7M, Including $780K in Restitution to Customers that Invested in Puerto Rico Securities

The Financial Industry Regulatory Authority (“FINRA”)  has fined Merrill Lynch, Pierce, Fenner & Smith Inc (“Merrill Lynch”) $6.25 million and imposed a restitution penalty of $780,000 over Merrill Lynch’s inadequate supervision of its customers that employed leverage in brokerage accounts, as well as its failure to supervise the way that these customers were able use the proceeds from their loan managed accounts (“LMAs”). LMAs are credit lines that let customers use the securities in their brokerage accounts as collateral in order to borrow funds from a bank affiliate.  However, these LMAs are not supposed to be used to purchase additional securities.

The $780,000 will go to customers that invested in Puerto Rico municipal bonds and Puerto Rico closed-end bond funds. By settling Merrill Lynch is not admitting or denying FINRA’s findings.

According to FINRA, Merrill Lynch did not have these adequate procedures and supervisory systems at issue in place from 1/2010 through 11/2014. FINRA found that even though Merrill Lynch’s policy and non-purpose LMA agreements barred customers from using LMA proceeds to buy different kinds of securities, there were thousands of times during the relevant period that, within two weeks of getting LMA proceeds, Merrill Lynch brokerage accounts collectively purchased hundreds of millions of dollars of securities. Merrill Lynch also set up over 121,000 LMAs, with Bank of America (“BAC”) extending over $85 Billion in aggregate credit. FINRA said that all of this was able to happen because the firm’s supervisory procedures and systems were inadequate.

FINRA also accused Merrill Lynch of not adequately training brokers about LMAs and failing to educate them about the different ways that the loan accounts could be used. Although the brokers did not get compensation for setting up LMAs for customers, they were paid compensation when a customer would use an LMA account.

Separately, FINRA found that from 1/2010 through 7/2013, Merrill Lynch also did not have the adequate procedures and supervisory systems to  make sure that transactions involving certain Puerto Rico securities were suitable. The SRO was referring, in particular, to customers with holdings that were heavily concentrated in these securities and highly leveraged through margin or LMAs. During the relevant period, 25 of these leveraged customers, with conservative or moderate investment goals and modest net worths, saw these securities suffer aggregate loses of almost $1.2 million. These customers had invested at least 75% of their assets invested in Puerto Rico securities, which were  eventually liquidated to satisfy margin calls.

Puerto Rico Securities Fraud
For the past three years, our Puerto Rico bond and closed-end bond fund attorneys have been working with investors to recoup their investment losses. Unfortunately, many investors on the island and the US mainland lost money—some to a catastrophic degree—because they were wrongly advised by brokers with certain brokerage firms, including Merrill Lynch, Banco Popular, Banco Santander (SAN), and UBS Puerto Rico (UBS-PR), to invest in the island.  The plunge of the Puerto Rico bonds’ value in 2013 is one that investors and the US territory, which remains in $70 Billion of debt, have yet to recover from.

Contact Shepherd Smith Edwards and Kantas, LTD LLP for a free, no obligation case consultation today.

FINRA Sanctions Merrill Lynch $7M for Inadequate Supervision of Securities-Backed Leverage in Customer Brokerage Accounts, FINRA, November 30, 2016

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