The Financial Industry Regulatory Authority (FINRA) announced today that it has censured and fined Merrill Lynch for deficiencies in required disclosure reports and for often failing to file such reports. Merrill was fined $500,000 for its supervisory lapses. The violations, which supposedly went undetected for years, involved non-disclosure or inadequate disclosure of customer complaints, arbitration claims, and related mandatory reporting pertaining to employment applications and terminations (i.e., Forms U4 and U5). FINRA’s Chief of Enforcement, Brad Bennett, said of the charges, “Firms that fail to file important regulatory information in a timely manner can compromise the integrity of CRD and BrokerCheck. In this instance, Merrill Lynch failed to report critical information that regulators and investors rely upon. Without timely and accurate reporting by firms, investors only have part of the picture when researching and making decisions about their brokers.”
In the Merrill Lynch case, FINRA found that:
- From 2007 to 2011, Merrill Lynch failed to file or failed to timely file more than 650 required reports, including customer complaints and customer settlements.
- From 2005 to 2011, Merrill Lynch failed between 23 percent and 63 percent of the time to report or timely report customer complaints and related Forms U4 and Forms U5.
- Merrill Lynch failed to adequately train and supervise personnel responsible for customer complaint tracking and reporting, and did not have systems in place to identify the high volume of customer complaints that were not being acknowledged or reported as required. As a result, Merrill Lynch failed to acknowledge nearly 300 customer complaints in a timely manner.
- Merrill Lynch failed to file or timely file approximately 300 non-NASD/FINRA arbitrations and criminal and civil complaints that it received for approximately three years. From July 2007 to June 2009, and again from October 2009 to February 2010, Merrill Lynch failed to make these filings 100 percent of the time.
- From 2007 through 2010, Merrill Lynch failed to file related Forms U4 and U5 between 28 percent and 79 percent of the time.
As counsel for aggrieved investors, we think these are incredibly serious infractions. Because we have no choice but to rely on the integrity of brokerage firms to meet their self-reporting duties, the degree to which Merrill flouted the rules is utterly scandalous. Consequently, we can’t understand why Merrill was only fined $500,000. To say this was a slap on the wrist would be a gross understatement considering that Merrill Lynch earned more than $800 million in profits for the first half of 2012 alone. FINRA’s sanction is equivalent to hitting an elephant with a miniature marshmallow. Yet the damage caused by reporting failures is incalculable. Merrill’s lapses compromised the ability of investors to assess the background of certain brokers via FINRA’s public disclosure program, BrokerCheck. They corrupted the pool of information from which background checks were conducted by firms who hired former Merrill brokers. They reduced the ability of securities regulators to review brokers’ transfer applications. They hindered FINRA in its performance of investigations. Moreover, they prevented lawyers for abused investors (in other words, lawyers like us) from obtaining evidence that might well have been vital in cases brought against Merrill Lynch.
It’s tough not to be cynical when stuff like this happens. Having been fined next to nothing by FINRA, Merrill Lynch probably came out way ahead by breaking the rules rather than following them. The fact is that when it comes to a Wall Street firm, the profits from financial misconduct usually will vastly outweigh the costs of getting caught and sanctioned. Until regulators begin to assess penalties big enough to really cause pain to these mega-firms, the scandals will keep on coming.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.