Wall Street's self-funded regulator said on Monday it fined Bank of America Corp's Merrill Lynch unit a total of $6 million over violations of certain short-selling rules designed to prevent market manipulation.
In a short sale, a trader borrows stock and then sells it at a lower price to turn a profit. If one of the parties in a transaction does not have enough cash to pay for the position, or does not own the underlying assets that are to be delivered, the result is a "fail-to-deliver position" that must be closed out by borrowing or buying securities of like kind and quantity.
The Financial Industry Regulatory Authority (FINRA) said that from September 2008 to July 2012, Merrill Lynch Professional Clearing Corp did not attempt to close out certain fail-to-deliver positions, and lacked systems and procedures in to address the close-out requirements during much of that time.
The regulator also blasted Merrill's supervisory systems and procedures. It said that from September 2008 through March 2011, Merrill's broker dealer improperly allowed the allocation of fail-to-deliver positions to clients based solely on each client's short position regardless of whether those clients caused or contributed to Merrill's fail-to-deliver position.
A "firm's failure to establish systems and procedures to properly close out its fail-to-deliver positions could have potentially negative market impact, which could harm investors," said Brad Bennett, FINRA's chief of enforcement.
In June, FINRA fined Merrill $8 million and Merrill also agreed to reimburse $24.4 million to customers to settle allegations that it overcharged more than 47,000 retirement accounts and charities that invested in mutual funds.
