Bank of America Corporation’s BAC Merrill Lynch has been penalized by the Securities and Exchange Commission (SEC) for using incorrect data in executing short sale orders. Two units of Merrill Lynch are set to pay $11 million, and admit to their wrongdoing.
The total amount consists of a penalty of $9 million, disgorgement of $1.57 million and $0.33 million in prejudgment interest. Merrill Lynch has also agreed to retain an independent compliance consultant.
Per the SEC orders, customers regularly asked Merrill Lynch and other broker-dealers to “locate” stock for short selling. For this purpose, the firms prepared easy-to-borrow (ETB) lists. However, several times in a trading day Merrill Lynch included some securities in the list in the morning which later became no longer easily available for borrowing purpose.
Though the staff at Merrill Lynch stopped using the ETB list, the firm’s execution platforms continued processing short sale orders based on the ETB list, which was not updated. The execution platforms used correct and current data only after receiving the next day’s ETB list. This constituted violation of Rule 203(b) of Regulation SHO of the Exchange Act governing short sales.
The SEC also stated that the flaw in Merrill Lynch’s system led to use of data that was over 24 hours old while preparing the ETB list. Consequently, the firm accepted and executed short sale orders based on the defective list, which included a number of securities which should have been excluded.
Following the SEC’s investigation in the matter, Merrill Lynch started implementing systems as a corrective measure.
BofA currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include Northern Trust Corporation NTRS, The Bank of New York Mellon Corporation BK and Central Valley Community Bancorp CVCY. While Central Valley sports a Zacks Rank #1 (Strong Buy), both Northern Trust and BNY Mellon carry a Zacks Rank #2 (Buy).
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