BofA Faces $7M Fine from FINRA for Inadequate Supervision


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The regulator of securities firms in the U.S., the Financial Industry Regulatory Authority (FINRA) has imposed a fine of $7 million on Merrill Lynch, a unit of Bank of America Corporation BAC , for inadequate supervision of securities-backed leverage in their clients' brokerage account. Merrill Lynch will pay $6.25 million in fine and around $780,000 in restitution to settle the charges.

Merrill Lynch's clients used leverage to buy Puerto Rican municipal bonds and other securities. The regulator separately found that from Jan 2010 through Jul 2013, the company's systems lagged in ensuring the suitability of such securities for its customers.

The regulator mentioned that during this period, 25 customers with modest net worth and investment objectives had 75% or more of their portfolios invested in Puerto Rican securities and lost approximately $1.2 million when they liquidated those securities to meet margin calls. Merrill Lynch will pay nearly $780,000 in restitution to 22 affected clients who were leveraged and had a high percentage of their assets invested in Puerto Rico securities. Notably, the company has already compensated some customers.

Per the regulator, Merrill Lynch's loan management accounts (LMAs) are lines of credit that allow customers to borrow money from an affiliated bank using securities held in the brokerage accounts as collateral. Notably, holdings in such securities were highly leveraged through either LMAs or margin. FINRA found that between Jan 2010 to Nov 2014, Merrill Lynch lacked adequate supervisory systems and procedures regarding its customers' use of proceeds from these LMAs.

Further, the regulator noted that Merrill Lynch's policy as well as the terms of the non-purpose LMA agreements barred customers from using LMA proceeds to purchase several types of securities. However, the firm's supervisory systems and procedures were not adequately designed to govern such use. Moreover, during this period, the company's brokerage accounts jointly purchased hundreds of millions of dollars within 14 days of receiving incoming transfers of LMA proceeds.

BofA spokesman, Bill Halldin, stated, "Following a comprehensive internal review of our loan management accounts, we reported issues to FINRA, cooperated fully with their inquiry and have strengthened our controls and procedures". Merrill Lynch neither admitted nor denied the charges.

Over the past few months, regulators have been targeting financial bigwigs over unfair business practices. In Sep 2016, Wells Fargo & Company WFC faced a combined fine of $190 million from California and federal regulators over the opening of nearly 1.5 million of unauthorized deposit accounts. In Oct 2016, Morgan Stanley MS was charged with conducting an unethical, high-pressure sales practice against their clients' brokerage accounts.

Shares of BofA have gained more than 25% on the NYSE so far this year; outpacing 11.3% gain of the Zacks categorized Major Regional Banks industry.

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Currently, Bank of America carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .

Another stock in the same space worth considering is The Bank of New York Mellon Corporation BK , also holding a Zacks Rank #2. The Zacks Consensus Estimate for the current year increased nearly 4% to $3.15 per share over the last 60 days.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Business , Stocks
Referenced Symbols: BK , WFC , BAC , MS


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