Notice of Disciplinary Action against Merrill Lynch, Pierce,Fenner & Smith Incorporated and Merrill Lynch Professional
Clearing Corp., Member Organizations
To:Members, Member Organizations, Participants and Participant Organizations

From:

John C. Pickford, Assistant General Counsel, NASDAQ OMX PHLXSM

DATE:June 24, 2015

FINRA Matter No. 20110277299 (includes Matter No. 20110277298)
Enforcement No. 2015-04
On June 8, 2015, the Business Conduct Committee (the “Committee”) issued a disciplinary
decision against Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Pierce”) andMerrill Lynch Professional Clearing Corp. (“Merrill Pro”) (collectively, the “Firms”),
member organizations of the Exchange. In response to a Statement of Charges issued inthis action, the Firms submitted an Offer of Settlement, Stipulation to Findings andConsent to Sanctions (“Offer”). Solely to settle this proceeding, and without admitting ordenying the charges, the Firms stipulated to findings that they violated Section 17(a)(1)of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 17a-3 promulgatedthereunder, and Exchange Rules 707, 760, 785(c), 1014(g)(i)(A), 1053 and 1063(e)(i), byentering and executing orders with incorrect origin codes, resulting in: (i) transactions
executed by the Firms that may have traded ahead of other orders entitled to execution
priority; (ii) potential adverse impact to the execution price and quantity of other market
participants’ orders; (iii) an inaccurate audit trail and inaccurate order records; (iv) trades
being reported to The Options Clearing Corporation with inaccurate trade details; and (v)an adverse impact to the Exchange’s ability to surveil for and detect potential violations ofits rules and federal securities laws. Merrill Pierce did so from 2004 through 2014, andMerrill Pro did so from 2005 through 2011. Additionally, staff concluded that the Firms
had supervisory deficiencies related to these matters. In summary, from 2004 to 2014, inviolation of Exchange Rule 748, the Firms failed to have supervisory systems and controls
in place, including a separate system of follow-up and review, reasonably designed toachieve compliance with the Exchange’s origin code requirements in that the Firms failedto do the following: (i) reasonably address origin code requirements in the development
and programming of their order entry systems; (ii) maintain written supervisory
procedures reasonably designed to achieve compliance with the Exchange’s rules relating
to the assignment of origin codes; (iii) adequately train their employees with respect tothe significance of properly marking origin codes in their order entry systems; and (iv)adequately supervise their employees with respect to the proper marking of origin codes.
The Offer submitted by the Firms was accepted by the Committee and was the basis of its
Decision. The Committee found that the Firms violated each of the aforementioned rules,
concurred in the sanctions consented to by the Firms, and ordered the imposition of thefollowing sanctions: (i) a censure; (ii) a joint and several fine of $9,000,000, of which$1,125,000 shall be paid to the Exchange; (iii) an undertaking by Merrill Pierce, pursuant
to which at intervals of 90, 180, 270 and 360 days after the Decision on the Offer became
final, Merrill Pierce must make a written submission to the Exchange regarding its
compliance with Exchange rules, policies and practices governing the inclusion of accurate
account origin codes in order and execution records and data; and (iv) an undertaking by
Merrill Pro, pursuant to which Merrill Pro must submit, within 30 business days of
acceptance of this Offer, a signed dated letter, or an e-mail from a work-related accountof the firm’s registered principal, providing the following information: (1) a reference tothis matter; (2) a representation that Merrill Pro has revised its written supervisory
procedures to address its deficiencies; and (3) the date on which the revised procedures
were implemented. The Firms will pay the balance of their fine to BATS Exchange, Inc.;
Chicago Board Options Exchange, Incorporated; International Securities Exchange, LLC;
NASDAQ OMX BX, Inc.; The Nasdaq Options Market LLC; and NYSE Regulation, Inc.
For more information, contact:
John C. Pickford, Enforcement Counsel, NASDAQ OMX PHLX, at +1 215 496 5273

 Copyright 2009 The NASDAQ OMX Group, Inc. All Rights Reserved.

2