Merrill fined $500,000 for not filing reports: FINRA

(Reporting By Suzanne Barlyn; Editing by Alden Bentley)

(Reuters) - Merrill Lynch accepted a $500,000 fine to settle charges that it failed to file, or was late with, hundreds of required reports about its brokers, including details of customer complaints, Wall Street's industry-funded watchdog announced Monday.

In addition, Merrill Lynch, a unit of Bank of America Corp, did not properly supervise or train employees who were responsible for tracking and reporting complaints about brokers, said the Financial Industry Regulatory Authority (FINRA), which also censured Merrill.

The firm's conduct, which occurred between 2005 and 2011, included not notifying FINRA about 650 reports, ranging from arbitration claims filed by customers to settlements reached by the brokerage, according to a regulatory document.

Securities industry rules require brokerages to disclose certain information about its brokers, including criminal and civil complaints involving them, typically within 30 days. Those details are available in databases for regulators, other securities brokerages, and investors. Brokerages must also submit a form to the regulator when it hires a new broker or when a broker leaves.

Merrill's violations may have prevented investors from fully researching the backgrounds of certain brokers through FINRA's database for investors, known as BrokerCheck, FINRA said.

The brokerage learned of the problems during an internal review that began in 2009, according to Merrill spokesman, William Halldin. "We have enhanced our policies and procedures to address issues raised in this matter and to ensure that client complaints are properly reported," Halldin said.

Among the problems: The firm was late or failed to report certain criminal and civil complaints it received about brokers during a three-year period, according to FINRA.

Merrill self-reported its problems to FINRA, according to its settlement with the regulator. As part of the settlement, Merrill neither admitted nor denied the charges, but consented to FINRA's findings

Expungement by FINRA

When a broker is named as a respondent in a customer-initiated arbitration, the arbitration claim and any allegations of wrongdoing are required to be reported on the broker's Form U4. Brokerage firms must submit a disclosure report when a broker is the "subject of" allegations of sales practice violations made in arbitration claims or civil lawsuits, but is not a named party to the arbitration or lawsuit. Once reported, this information is recorded on the broker's record in the Central Registration Depository (CRD®) System and becomes available to the public upon request through FINRA's BrokerCheck program.

Brokers may seek to have a reference to allegations or to involvement in an arbitration removed from their CRD® System records. The process of removing this information from the CRD® system is called "expungement."

Before ruling on a request for expungement, the arbitrators must review and follow the procedures provided under FINRA Rules 2080, 12805 and 13805.

FINRA Rule 2080 contains standards and procedures for expungement of customer dispute information from CRD. The rule requires that a court of competent jurisdiction confirm an arbitration award granting expungement relief or order such expungement.  It also requires that firms or associated persons name FINRA as an additional party in any court proceeding in which they seek an order to expunge customer dispute information or request confirmation of an award containing an order of expungement. FINRA will generally oppose confirmation of the expungement portion of the arbitration award in most cases in which it participates in the judicial proceeding.

Upon request, however, FINRA, in its discretion, may waive the requirement to name FINRA as a party in these proceedings provided the arbitration award directing expungement contains at least one of the following judicial or arbitral findings:

the claim, allegation or information is factually impossible or clearly erroneous;
the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
the claim, allegation or information is false.

FINRA Rules 12805 and 13805 provide enhanced safeguards to ensure that arbitrators have the opportunity to consider the facts that support or weigh against a decision to grant expungement. These rules also provide that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in FINRA Rule 2080. Under FINRA Rules 12805 and 13805, the panel must follow the outlined procedures in order to grant expungement of customer dispute information under FINRA Rule 2080:

The arbitration panel must hold a recorded hearing session by telephone or in person regarding the appropriateness of expungement.

In cases involving settlements, the arbitration panel must review the settlement documents, consider the amount paid to any party and consider any other terms and conditions of the settlement that might raise concerns about the associated person's involvement in the alleged misconduct before awarding expungement.
The arbitration panel must indicate which of the grounds for expungement under FINRA Rule 2080(b)(1)(A)-(C) serves as the basis for their expungement order, and provide a brief written explanation of the reasons for ordering expungement.

The arbitration panel must assess against the parties requesting expungement relief all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement.