Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay a fine of US $1.2 million to the Commodity Futures Trading Commission related to the CFTC’s allegation that, from at least January 1, 2010, through April 2013, it failed to employ “an adequate supervisory system” related to the processing of exchange and clearinghouse fees charged to the firm’s customers.
This large fine was assessed despite Merrill apparently self-detecting its reconciliation issues, and endeavoring to correct them. Merrill is registered with the CFTC as a futures commission merchant.
According to the CFTC, in December 2012, the director of the fee group at Merrill brought to his manager’s attention the fact that he was not able to reconcile for November 2012 the amount of exchange and clearing fees collected from the firm’s customers and the amount of fees charged by the relevant exchanges and clearinghouses. These amounts should be equal.
In response, Merrill’s senior management reviewed the reconciliations for November and December 2012, and when they identified weaknesses, the firm commenced an internal review of reconciliations conducted by Merrill’s fee group. The firm also commenced a project to improve its reconciliation process, which included retaining two outside consulting firms to assist it and to help correct past problems.
Through its review, Merrill determined that exchange and clearinghouse fees for the Chicago Mercantile Exchange were not reconciled properly from January 2010 through October 2013 and those for the Chicago Board of Trade were done incorrectly from January 2011 to October 2013.According to the CFTC, for the relevant time, Merrill "paid more than $318 million in exchange and clearing fees to the CME and CBOT…, but had unexplained over-accruals of approximately $415,318 (0.14% of fees paid) from 196 clients."
This shows, claims the CFTC, that Merrill did not have an adequate supervisory system during the relevant time and “failed to perform its supervisory duties diligently.” The Commission also asserts that Merrill did not have procedures in place for staff during the relevant time on “how to conduct fee reconciliations.”
Under the terms of its settlement, in addition to paying a fine, Merrill is required to retain an outside consulting firm to review its fee reconciliation processes and procedures, provide training, and help the firm avoid futures law violations in connection with its clearing fee reconciliation process.
As part of its settlement, Merrill did not admit or deny any of the CFTC’s findings or conclusions.
My View: Some readers will reflect on the Merrill Lynch settlement and shake their heads. What is the reward, they may ask, for self-detecting a problem, voluntarily retaining two consulting firms to help fix the issue, mostly fixing the issue, and taking decisive action in connection with a found issue (e.g., firing a supervisor)? Does the CFTC truly believe human error can fully be avoided? Without having heard from staff of the Division of Enforcement, I am sure they will suggest that without Merrill Lynch taking its remediation steps in this matter, the settlement fine would have been greater. Perhaps. But whether it results in a smaller sanction or not in connection with a potential CFTC enforcement action, firms should continue to endeavor to ferret out problems, self-correct them promptly, and implement enhanced policies and procedures to help prevent a future reoccurrence. This is part of a robust compliance culture—whether the CFTC gives adequate credit or not.