Merrill Lynch Fined $6 Million Over Short-Selling Lapses

Bank of America Corp.’s Merrill Lynch was fined a total of $6 million by the Financial Industry Regulatory Authority over U.S. short-selling rules.

Merrill Lynch Professional Clearing Corp. was penalized $3.5 million by the industry-financed regulator for violating Regulation SHO, a Securities and Exchange Commission rule designed to prevent abusive short-selling, according to a Finra statement today. Merrill Lynch’s broker-dealer was fined $2.5 million for failing to establish and enforce procedures designed to prevent such actions, Finra said.

In a short sale, an investor sells a security it doesn’t own, betting the price will decline before it has to buy the shares to close the trade. Under Regulation SHO, brokers can only accept short-sale orders when they can reasonably ensure the shares needed to cover the bets will be available.

“Firms must ensure that their supervisory systems are designed to address and ensure compliance with Regulation SHO,” Brad Bennett, Finra’s chief of enforcement, said in the statement.

One of the violations cited by Finra occurred in 2008 during the financial crisis, when Merrill Lynch allowed some short-sellers to dump bank stocks without first arranging to borrow them, breaking SEC emergency orders intended to prevent manipulation.

‘Improved’ Procedures

“We take very seriously our obligations and have improved our procedures to address issues identified by Finra,” Bill Halldin, a spokesman for Charlotte, North Carolina-based Bank of America, said in an e-mailed statement.

Finra also fined Credit Suisse Group AG and UBS AG for violations related to Regulation SHO in 2011.

During the financial crisis, Lehman Brothers Holdings Inc. Chief Executive Officer Richard Fuld blamed speculators for the investment bank’s collapse and the SEC investigated short-selling abuses. A later report by Lehman’s bankruptcy examiner found that the bank used off-balance-sheet transactions to understate its leverage.

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