DOB: Merrill Lynch - 2011 Consent Order

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IN THE MATTER OF:

MERRILL LYNCH, PIERCE,
FENNER & SMITH
INCORPORATED

(CRD No. 7691)


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CONSENT ORDER

No. CO-10-7902-S

I. PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
 
WHEREAS, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), of One Bryant Park, New York, New York, has been registered as a broker-dealer under the Act since March 11, 1940;
 
WHEREAS, state securities regulators from multiple jurisdictions have conducted coordinated investigations into the registration of Merrill Lynch Client Associates (“CAs”) and Merrill Lynch’s supervisory system with respect to the registrations of CAs;
 
WHEREAS, the Commissioner, through the Securities and Business Investments Division of the Department of Banking (“Division”), participated in such coordinated investigations pursuant to Section 36b-26(a) of the Act;
 
WHEREAS, Merrill Lynch has cooperated with regulators conducting the investigations by responding to inquiries, providing documentary evidence and other materials, and providing regulators with access to facts relating to the investigations;
 
WHEREAS, Merrill Lynch has advised regulators of its agreement to resolve the investigations pursuant to the terms specified in this Consent Order;
 
WHEREAS, Merrill Lynch agrees to make certain changes in its supervisory system with respect to the registration of CAs, and to make certain payments in accordance with the terms of this Consent Order;
 
WHEREAS, Section 36b-15(a) of the Act authorizes the Commissioner to suspend or revoke any registration or to restrict a registrant’s securities activities in this state if, inter alia, the Commissioner finds that (1) the order is in the public interest, and (2) the registrant has violated the Act, or any regulation or order under the Act, and/or has failed reasonably to supervise its agents;
 
WHEREAS, Section 36b-27(a) of the Act authorizes the Commissioner to order any person who has violated, is violating or is about to violate any provision of the Act or any regulation, rule or order adopted or issued under the Act to cease and desist from such violation;
 
WHEREAS, Section 36b-27(d) of the Act authorizes the Commissioner to impose a fine of up to One Hundred Thousand Dollars ($100,000) per violation against any person who has violated any provision of the Act or any regulation, rule or order adopted or issued under the Act;
 
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive”;
 
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-33, inclusive”;
 
WHEREAS, an administrative proceeding initiated under Sections 36b-15 and 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the General Statutes of Connecticut;
 
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;

II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, Merrill Lynch, through its execution of this Consent Order, voluntarily waives the following rights:

1.
To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut;
2.
To present evidence and argument and to otherwise avail itself of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut;
3. To present its position in a hearing in which it is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order;

III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER

Solely for the purpose of terminating the multi-state investigations, including the investigation by the Division, and in settlement of the issues contained in this Consent Order, Merrill Lynch, without admitting or denying the findings of fact or conclusions of law contained in this Consent Order, consents to the entry of this Consent Order by the Commissioner.
 
NOW, THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.

IV.  FINDINGS OF FACT

1.  Merrill Lynch admits the jurisdiction of the Commissioner in this matter. 


Background on Client Associates

2. The CAs function as sales assistants and typically provide administrative and sales support to one or more of Merrill Lynch’s Financial Advisors (“FAs”).  There are different titles within the CA position, including Registered Client Associate and Registered Senior Client Associate.
3. The responsibilities of a CA specifically include:
   
a.  Handling client requests;
b. Resolving client inquiries and complaints;
c. Determining if client issues require escalation to the FA or the branch management team; and
d. Processing of operational documents such as letters of authorization and client check requests.
4.
In addition to the responsibilities described above, and of particular significance to this Consent Order, some CAs are permitted to accept unsolicited orders from clients.  As discussed below, Merrill Lynch’s written policies and procedures require that any CAs accepting client orders first obtain the necessary licenses and registrations.
5.
Notably, FAs might have a “primary CA” and a “secondary CA.”  As suggested by the designation, the customary practice is that the primary CA would handle the FA’s administrative matters and client orders.  However, if the primary CA was unavailable, the secondary CA would handle the FA’s administrative matters and client orders.
6. During the period from 2002 to the present, Merrill Lynch employed approximately 6,200 CAs (average) per year.

Registration Required

7.
Section 36b-6(a) of the Act provides, in part, that:  “No individual shall transact business as an agent in this state unless such individual is (1) registered as an agent of the broker-dealer . . . whom such individual represents in transacting such business . . . .”;
8.
Section 36b-3(1) of the Act defines “agent” to mean:  “any individual, other than a broker-dealer, who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities”;
9. Pursuant to the general prohibition under Section 36b-6(a) of the Act, a person cannot accept unsolicited orders in Connecticut without being registered as an agent;
10. Section 36b-6(b) of the Act prohibits a broker-dealer from employing an agent unless “such agent is (1) registered under sections 36b-2 to 36b-33, inclusive . . . . ”;

Merrill Lynch Requires Registration of Client Associates

11. In order for a CA to accept client orders, Merrill Lynch generally required each CA to pass the series 7 and 63 qualification exams and to register in the appropriate jurisdictions.
12.
At all times relevant to this Consent Order, Merrill Lynch’s policies and procedures specified that each CA maintain registrations in the same jurisdictions as his or her FA, or broadly required that each CA maintain registrations in all necessary jurisdictions.

Regulatory Investigations and Findings

13.
In May 2008, state securities regulators received a tip alleging that Merrill Lynch was failing to ensure its CAs were in compliance with jurisdictional registration requirements and its own procedures.  The tip alleged that Merrill Lynch CAs were registered in two jurisdictions – the CA’s home state and one neighboring state – because Merrill Lynch only paid for registrations in two jurisdictions.
14.
During the summer of 2008, Merrill Lynch received inquiries regarding CA registrations from a number of state securities regulators.
15.
Because Merrill Lynch’s relevant trade records were maintained in hard copy and only at branch offices across the country, the multi-state investigation focused on systemic issues with Merrill Lynch CA registrations and related supervisory structure instead of attempting to identify each incidence of unregistered activity.  Specifically:l
    
a. After accepting a client order, CAs accessed the electronic trading system to enter the order;
b.  The CAs did not have to identify themselves during the order entry process.  Therefore, there is no electronic record that identifies which orders were accepted by CAs;
c. Instead, Merrill Lynch maintained a daily report that recorded the identity of the person who accepted and/or entered each order. However, this report was not maintained electronically, and was only maintained at the branch office where the order was entered.  Merrill Lynch represented that this daily report was the only record that could identify who accepted a client order.
d. Merrill Lynch’s trading system checked the registration of the FA, but did not check the registration status of the person accepting the order to ensure that the person was registered in the appropriate jurisdiction.
 
16. The multi-state investigation found that many CAs supported FAs registered in Connecticut when the CAs were not registered in Connecticut as agents of Merrill Lynch.  This difference in registration status increased the possibility that CAs would engage in unregistered activity.
17. The multi-state investigation found that certain Merrill Lynch CAs engaged in the sale of securities in Connecticut at times when the CAs were not appropriately registered in Connecticut.

Merrill Lynch’s Remedial Measures and Cooperation

18.
As a result of the inquiries by state regulators, Merrill Lynch conducted a review of its CA registration practices.
19.
Merrill Lynch’s review found that as of June 30, 2008, the firm had 3,780 registered CAs.  Approximately 2,200, almost 60%, of those registered CAs were only registered in their home state or their home state and one additional state.
20. Consistent with the fact that many Merrill Lynch CAs were only registered in one or two jurisdictions, Merrill Lynch’s review found incidences of trading by CAs not properly state registered.
21. In October 2008, Merrill Lynch amended its registration policy to require that each CA mirror the state registrations for the FAs that they support.1   Merrill Lynch’s Registration Compliance personnel participated in calls with branch management to advise the field about this requirement.
22. As Merrill Lynch worked on a more permanent solution, it also developed a temporary report intended to identify instances where a CA’s registration did not match the FA or FAs the CA supported.
23. Between October 1, 2008 and January 28, 2009, four hundred ninety seven (497) CAs registered under the Act as agents of Merrill Lynch.  Yet, data as of February 28, 2009 indicated that significant gaps remained between the registrations of CAs and their FAs.
24. However, Merrill Lynch, as a compliance enhancement, also developed an electronic system that will prevent a person from entering client orders from a state in which the person accepting the order is not registered.  Merrill Lynch has represented to the Division that this system, which enhanced Merrill’s primary trading systems for bond and equities trading, was fully implemented by December 31, 2009, and that the firm has engaged in an ongoing assessment of firm processes to determine where additional changes, related to the merger with Bank of America or otherwise, may enhance the firm’s registration compliance program.2
25. Merrill Lynch provided timely responses and substantial cooperation in connection with the regulatory investigations into this issue.  Furthermore, as displayed by the corrective actions described above, Merrill Lynch has acknowledged the problems associated with its CA registrations and supervisory system.

V. CONCLUSIONS OF LAW

1. The Commissioner has jurisdiction over this matter pursuant to the Act.
2.
Merrill Lynch’s failure to establish an adequate system to monitor the registration status of persons accepting client orders constitutes a violation of Section 36b-31-6f(b) of the Regulations and a basis for initiating administrative proceedings under Sections 36b-15(a)(2)(K), 36b-15(a)(2)(B), 36b-27(a) and 36b-27(d) of the Act;
3.
Merrill Lynch’s failure to require its CAs to be registered in the appropriate jurisdictions constitutes a failure to enforce its established written procedures, and is a violation of Section 36b-31-6f(b) of the Regulations, forming a basis for initiating administrative proceedings under Sections 36b-15(a)(2)(B), 36b-27(a) and 36b-27(d) of the Act;
4. Merrill Lynch’s sales of securities in Connecticut through unregistered CAs constitute violations of Section 36b-6(b) of the Act and a basis for initiating proceedings under Sections 36b-15(a)(2)(B), 36b-27(a) and 36b-27(d) of the Act;
5. The Commissioner finds that this Consent Order and the relief described herein are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act.

VI. UNDERTAKINGS AND REPRESENTATIONS

1. Merrill Lynch hereby undertakes and agrees to immediately establish and maintain a trade monitoring system that prevents any person from entering client orders that originate from jurisdictions where the person accepting the order is not appropriately registered.
2.
Merrill Lynch further undertakes and agrees to file with the Commissioner, within sixty days of the date this Consent Order is entered by the Commissioner, a report describing Merrill Lynch’s improvements in its ability to monitor the identity and registration status of each person who accepts a client order entered on Merrill Lynch’s trading system.

VII. CONSENT ORDER

On the basis of the Findings of Fact, Conclusions of Law, and Merrill Lynch’s consent to the entry of this Consent Order,

IT IS HEREBY ORDERED THAT:

1.
This Consent Order concludes the investigation by the Commissioner and any other action that the Commissioner could commence against Merrill Lynch under the Act on behalf of Connecticut as it relates to unregistered activity in Connecticut by Merrill Lynch’s CAs and Merrill Lynch’s supervision of CA registrations during the period from January 1, 2004 through the date of this Consent Order.
2.
This Consent Order is entered into solely for the purpose of resolving the referenced multi-state investigation, and is not intended to be used for any other purpose.  For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against Merrill Lynch including, limiting or creating liability of Merrill Lynch, or limiting or creating defenses of Merrill Lynch, to any claims.
3.
Merrill Lynch shall CEASE AND DESIST from engaging in the sale of securities in or from Connecticut through persons not registered under the Act as agents of Merrill Lynch.
4.
Within ten (10) days after the entry of this Consent Order by the Commissioner, Merrill Lynch shall pay the sum of Three Hundred Fifty Nine Thousand One Hundred Dollars ($359,100) to the “Treasurer, State of Connecticut” by electronic funds transfer or wire transfer, such amount representing an administrative fine and reimbursement for past due agent registration fees.
5.
The amount reflected in paragraph 4. of Section VII of this Consent Order represents the State of Connecticut’s proportionate share of the Twenty six million, five hundred sixty three thousand, ninety four dollars and fifty cents ($26,563,094.50) negotiated settlement between Merrill Lynch and the multi-state working group.  If any state securities regulator determines not to accept Merrill Lynch’s settlement offer, the total amount of the payment to the State of Connecticut shall not be affected, and shall remain at Three Hundred Fifty Nine Thousand One Hundred Dollars ($359,100).
6.
Merrill Lynch is hereby ordered to comply with the Undertakings contained herein.
7.

This Consent Order is not intended by the Commissioner to subject any Covered Person to any disqualifications under the laws of the United States, any state, the District of Columbia, Puerto Rico, or the U.S. Virgin Islands including, without limitation, any disqualification from relying upon the state or federal registration exemptions or safe harbor provisions.  “Covered Person” means Merrill Lynch or any of its affiliates and their current or former officers or former officers, directors, employees, or other persons that would otherwise be disqualified as a result of the Orders (as defined below).

8. This Consent Order and the order of any other State in related proceedings against Merrill Lynch (collectively, the “Orders”) shall not disqualify any Covered Person from any business that such Covered Person is otherwise qualified, licensed or permitted to perform under applicable securities laws of the State of Connecticut and any disqualifications from relying upon this state’s registration exemptions or safe harbor provisions that arise from the Orders are hereby waived.
9. This Consent Order shall be binding upon Merrill Lynch and its successors and assigns as well as the successors and assigns of relevant affiliates with respect to all conduct subject to the provisions above and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events, and conditions.

NOW THEREFORE, the Commissioner enters the following:

1. The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered;
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against Merrill Lynch, its affiliates or successors in interest based upon Merrill Lynch’s violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations or undertakings made by Merrill Lynch and set forth herein are subsequently discovered to be untrue or unfulfilled; and
3. This Consent Order shall become final when entered.


 
So ordered at Hartford, Connecticut      _______/s/_________
this 6th day of April 2011.      Howard F. Pitkin 
    Banking Commissioner 


CONSENT TO ENTRY OF ORDER

I, Joaquin M. Sena, state on behalf of Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Merrill Lynch; that Merrill Lynch agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Merrill Lynch voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.  Merrill Lynch further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Merrill Lynch shall pay pursuant to the foregoing Consent Order.

Dated this 5th day of April, 2011.     

 
MERRILL LYNCH, PIERCE, FENNER &
     SMITH INCORPORATED
  
           
By: ______/s/___________________
Joaquin M. Sena
  Title:  Associate General Counsel 


STATE OF NEW YORK     )    
      ) SS: 
COUNTY OF NEW YORK     )  
       

 
I certify that Joaquin M. Sena personally known to me, appeared before me this day and acknowledged the due execution of the foregoing instrument.
 
Witness my hand and official seal, this the April 5 2011.

(Official Seal)
 

_________/s/____________________
Notary Public
My Commission Expires: May 02 2014



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1  It should be noted that Merrill Lynch’s policy required CA/FA registration mirroring prior to 2006.  In 2006, it amended the relevant policies and procedures to more broadly require that CAs maintain appropriate registrations.

2  Note that in late October, 2009, Banc of America Investment Services, Inc. (“BAIS”) migrated on the Central Registration Depository to Merrill Lynch, however, the trading and order entry integration was not completed until the third quarter of 2010.  BAIS, whose policies have required sales assistants’ state registration status to mirror the FAs they serve, continued to use its own order entry system for its existing clients until the integration was completed.


  

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