According to FINRA, Merrill Lynch, Pierce, Fenner & Smith Incorporated has been censured and fined $275,000 for accepting market orders for equity new issues prior to the commencement of secondary market trading.

FINRA Rule 5131(d)(4) prohibits broker-dealers from accepting market orders for new equity issues before secondary market trading begins. This rule exists to protect investors from the volatility and price uncertainty that can occur when a new issue first begins trading.

The firm was found to have accepted the material terms of market orders before trading in the secondary market commenced, then executed those orders after the market opened. The firm's representatives received the material terms of these orders prior to the start of trading and routed them for execution once secondary market trading began.

The violation stemmed from the firm's failure to establish, maintain, and enforce a reasonably designed supervisory system. The firm's controls and written supervisory procedures inaccurately defined "acceptance" as the time the order was routed for execution, rather than when the material terms were received. This allowed representatives to accept order details before trading commenced without reasonable controls to reject such orders.

As part of the settlement, the firm is required to certify that it has remediated the identified issues and implemented a reasonably designed supervisory system.

What Investors Can Learn: Rules governing IPO trading exist to protect investors from heightened risks during the initial pricing period. Investors should understand that market orders for new issues can result in unexpected prices due to volatility in early trading.