← Broker database 2024-08-28
FINRA Fines BofA Securities and Merrill Lynch $3,000,000 for Failures in Detecting Potentially Manipulative Trading
According to FINRA, BofA Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, both based in New York, New York, were censured and fined a total of $3,000,000 (of which $669,000 is payable to FINRA) for failing to establish and maintain a supervisory system and written supervisory procedures reasonably designed to detect potentially manipulative trading. The firms were also required to certify that they have remediated the identified issues.
Market manipulation undermines the integrity of the securities markets and harms investors by distorting prices and creating artificial trading activity. Wash trading and prearranged trading are two forms of manipulation in which trades are executed to create the appearance of market activity without any genuine change in ownership or economic risk. These practices are prohibited because they deceive other market participants into believing there is legitimate supply, demand, or price movement in a security.
The findings revealed that BofA Securities and Merrill Lynch relied on third-party automated surveillances to detect potentially manipulative trading, but those surveillances were deficient. The parameters used in the surveillance systems were too narrow to identify potentially manipulative wash trading and prearranged trading. Between July 2017 and October 2018, Merrill Lynch failed to have any surveillance system in place to detect wash trading in OTC securities, leaving an entire segment of the market unmonitored for over a year. The firms also failed to review alerts generated by three wash trading and prearranged trading surveillance patterns, meaning that even when the systems did flag potential issues, those flags were not acted upon.
Relying on third-party surveillance tools is a common practice in the industry, but this case demonstrates that firms cannot simply outsource their compliance obligations. Firms remain responsible for ensuring that the tools they use are effective and that the alerts generated by those tools are properly reviewed and investigated.
For investors, this case is a significant reminder that even the largest and most well-known financial institutions can have serious gaps in their compliance systems. The $3,000,000 fine reflects the severity of the violations and the potential harm to market integrity. Investors should be aware that FINRA and other regulators actively monitor for manipulative trading and hold firms accountable when their supervisory systems fall short. This case also underscores the importance of market surveillance in maintaining fair and orderly markets, which ultimately benefits all investors.