The Securities and Exchange Commission announced an $11 million settlement with Merrill Lynch on Monday over a case involving the brokerage's missteps in fulfilling orders involving borrowed securities.
The agency said Merrill executed short sales in certain securities when there was not sufficient supply for such a transaction.
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SEC charged that Merrill used data that was more than 24 hours old for constructing so-called easy-to-borrow lists. The lists were not updated, even though during the course of a business day, Merrill learned that supply of some stocks had become restricted.
“Firms must comply with their short-selling obligations by making sure they do not rely on inaccurate ETB lists,” Andrew Calamari, director of the SEC's New York regional office said in a statement. “When firm personnel determine that a security should no longer be considered easy to borrow, the firm's systems need to incorporate that knowledge immediately.”
In several instances from January 2008 through January 2014, Merrill allowed its trade-execution platforms to conduct short sales totaling 2.3 million shares in securities that should not have been included on the ETB list because their availability was too low.
Merrill admitted to wrongdoing and agreed to pay a civil penalty of $9 million, a $1.6 million disgorgement and $334,564 in prejudgment interest. The firm also agreed to hire an independent compliance consultant to review its policies, procedures and practices for short sales.
“We have taken steps to improve our internal controls related to execution of short sales,” Merrill spokesman William Halldin said in a statement.
