Merrill Lynch To Pay $7 Million Penalty Charge For Misuse Of Order Information

The Securities and Exchange Commission charged Merrill Lynch, Pierce, Fenner & Smith with securities laws violations for having inadequate policies and procedures for controlling access to institutional customer order flow. Merrill Lynch agreed to settle the SEC's charges and pay

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The Securities and Exchange Commission charged Merrill Lynch, Pierce, Fenner & Smith with securities laws violations for having inadequate policies and procedures for controlling access to institutional customer order flow.

Merrill Lynch agreed to settle the SEC’s charges and pay a $7 million penalty, among other remedies.According to the SEC’s order instituting proceedings, Merrill Lynch utilizes institutional equities “squawk boxes,” which are internal intercom systems used by broker-dealers to broadcast institutional customer order information to traders and sales traders at the broker-dealer.

From 2002 to 2004, several Merrill Lynch retail brokers at three branch offices permitted day traders at other firms to listen to confidential information on large unexecuted block orders of Merrill Lynch’s institutional customers. The Merrill Lynch brokers put their telephones next to the squawk boxes and let the day traders listen to the squawk box, often for the entire trading day. The day traders used the broadcasts to trade ahead of the orders placed by Merrill Lynch’s customers.

“It is critically important that registered broker-dealers and investment advisers protect institutional order information and control its flow,” says Scott W. Friestad, deputy director, Division of Enforcement. “Otherwise, unscrupulous people may misuse the information to the detriment of investors.”

“Merrill Lynch gave sensitive order flow information to retail brokers who had no bona fide need for it,” says Kay Lackey, associate regional director of New York Regional Office, SEC.

“The firm lacked written policies or procedures to limit which employees within the firm had access to the equity squawk box, to track which employees had access, or to monitor employees for possible misuse of the order information. This created conditions that rogue brokers could exploit, as happened here.”

L.D.

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