Real World Control Failures : Merrill Lynch Today I will be presenting a real world control failure about Merrill Lynch. Presented by Jaspreet Marad

Background Merrill Lynch is a professional Wealth Management division of Bank of America It is one of the world’s largest securities brokerage firms Over 18,000 financial advisors and $2.4 trillion in client assets

Merrill Lynch Control Failure Merrill Lynch violated Section 15c3-5 of the Exchange Act During the period July 14, 2011 – December 2014 Caused market disruptions on at least 15 occasions Failed to establish controls that were reasonably designed to prevent the entry of orders that would exceed pre-set credit or capital limits for any of the trading desks associated with two of its primary trading units until long after the deadline set by the Rule for establishing such controls, Failed to establish any controls and supervisory procedures that were reasonably designed to prevent the entry of erroneous orders or orders that would exceed capital limits for fixed income securities for seven months after the Rule’s compliance date Failed to review adequately the effectiveness of its risk management controls and supervisory procedures for preventing the entry of erroneous orders Failed to comply with the Market Access Rule with regard to annual CEO certifications for 2013 and 2014. This control failure is about a company named Merrill Lynch who violated a section of the exchange act among other rules broker-dealers must follow. These rules stated that Merril Lynch must have “alternative trading system to establish risk management controls that are reasonably designed to prevent the entry of erroneous orders and to prevent the entry of orders that would exceed appropriate credit or capital thresholds. Merrill Lynch violated the Market Access Rule by failing to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of its market access activity.” Merrill Lynch caused market disruptions at least 15 times as well as failed to prevent erroneous orders, erroneous amounts of capital and failed to put in place controls to review these errors. Merrill Lynch also failed to comply with the Market Access Rule in regards to annual CEO certifications for two years.

Outcome Merrill Lynch agreed to pay a $12.5 million penalty for maintaining ineffective trading controls that failed to prevent erroneous orders from sent to the markets and causing mini-flash crashes. Merrill Lynch agreed to be censured and must cease and desist from further violations of Section 15(c)(3) of the Securities Exchange Act and Rule 15c3-5. These control failures resulted in Merrill Lynch agreeing to pay a 12.5 million penalty. Per Robert Cohen the Co-Chief of the SEC Enforcement Division’s market abuse unit “this is the highest-ever SEC penalty for violations of the Market Access Rule.  Despite multiple red flags, Merrill Lynch failed to evaluate adequately whether its controls were reasonably designed and failed to fix the problems quickly.”

How could this have been prevented? Implemented risk management controls that would prevent the entry of erroneous orders and prevent entry of orders that exceed capital threshold limits. Implement these controls in every channel of its order flow to maintain consistency. Implement controls that require compliance in regards to CEO certifications. All of this could have been prevented if Merrill Lynch has put in place strong consistent controls in order entry and their work flow process. Putting these controls in place and then performing checks to ensure that they are working could have prevented the firm large fees.