Broker-Dealer Litigation - Greenberg Traurig LLP

epresentatives provided complete and accurate disclosures to customers regarding the mutual
fund.
Later, the firm changed is supervisory structure, and in all but one branch, designated a
“centralized, independent branch supervision and controls group” to take the place of individual
direct OSJ managers for the branches. The group functioned through four Divisional Operations
Managers (“DOMs”), with responsibility for the branch offices within each of four regions. The
firm also revised its written supervisory procedures to place primary responsibility on the DOMs
for reviewing sales of the mutual fund, with such review focusing on suitability, without
inquiring as to whether the representatives had provided the proper disclosures to customers.
Additional improvements to the supervisory system that added exception reports still neglected
the need to ensure that the proper disclosures were made. As such, throughout the time period,
the evolving supervisory system was not reasonably designed to prevent and detect any
misrepresentations or omissions by firm’s representatives. The SEC’s order was also critical of
the supervision of other sales channels within the firm, for similar reasons, all centering on the
fact that the systems did not prevent or detect misrepresentation or omissions made by
representatives concerning the mutual fund.
The SEC concluded that the firm failed reasonably to supervise its representatives within
the meaning of Section 15(b)(4)(E) of the Exchange Act due to the representatives’ violations of
Section 17(a)(2) of the Securities Act, and the firm’s failure to implement adequate policies and
procedures and a system for applying established procedures reasonably designed to prevent or
detect such violations.
The SEC noted that the firm had undertaken to distribute, under an elaborate distribution
plan, the sum of $0.012 per share of the Fund, which is expected to total approximately $10
million. To resolve the charges, the firm consented to a censure. The SEC stated that it was not
imposing a penalty against the firm at this time, noting that in determining to accept the Offer of
Settlement by the firm, it had considered remedial acts voluntarily undertaken by the firm to
make improvements to its supervisory system, as well as the fact that the firm had undertaken the
distribution plan.
In re Merrill Lynch, Pierce, Fenner & Smith, Inc., Admin. Proc. File No. 3-14204, SEC Release
No. 34-63760, 2011 SEC LEXIS 280 (Jan. 25, 2011).
The firm settled charges that its proprietary traders misused institutional customer order
information which was shared with them by the firm’s market makers, and separately, that its
traders improperly charged mark-ups and mark-downs on certain riskless principal trades of
institutional and high net worth customers for which the firm had agreed to charge only a
commission equivalent. As a result of this conduct, the SEC found that the firm had violated
both Section 15(c)(1)(A) of the Exchange Act by effecting transactions in securities by means of
manipulative, deceptive or other fraudulent devices or contrivances, and Section 15(g) of the
Exchange Act by failing to establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the misuse of material, nonpublic information. In addition, the
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