NYSE AMERICAN LLC LETTER OF ACCEPTANCE, WAIVER, AND CONSENT NO. 2016-07-01304 TO: RE: NYSE AMERICAN LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent CRD No. 7691 Merrill Lynch, Pierce, Fenner & Smith Incorporated violated NYSE American Rules 16, 476(a)(6), and 966NY by having a previously executed customer order nullified and adjusted to an inferior price, without the knowledge or consent of its customer. In addition, Merrill Lynch violated NYSE American Rule 320 by failing to implement adequate supervisory systems and controls related to: (i) the best execution, nullification, and adjustment of client options orders, and (ii) the preservation of documents and information relevant to potential regulatory action. Consent to a censure, $135,000 fine, and an undertaking. Pursuant to Rule 9216 of the NYSE American LLC ("NYSE American" or the "Exchange")' Code of Procedure, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch" or the "Firm") submits this Letter of Acceptance, Waiver, and Consent ("AWC") for the purpose of proposing a settlement of the alleged rule violations described below. This AWC is submitted on the condition that, if accepted, NYSE American will not bring any future actions against the Film alleging violations based on the same factual findings described herein. I. ACCEPTANCE AND CONSENT A. Merrill Lynch hereby accepts and consents, without admitting or denying the findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of NYSE American, or to which NYSE American is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by NYSE American: BACKGROUND AND JURISDICTION 1. Merrill Lynch is a Delaware Corporation with its principal offices in New York, New York. Merrill Lynch is registered with the Securities and Exchange Commission as a broker-dealer and as an investment advisor, is a member of NYSE American, and became an Amex Trading Permit Holder on February 25, 1998. PROCEDURAL HISTORY At the time of the violations, the Exchange was known as "NYSE MKT LLC," and the NYSE American rules referenced herein were denominated NYSE MKT rules. ActiveUS 164732788v.1
2. This matter arises from a referral to NYSE Regulation by the Market Regulation Department of the Financial Industry Regulatory Authority, Incorporated ("FINRA"). VIOLATIONS 3. On July 27, 2015, Merrill Lynch violated NYSE American Rule 16 by failing to adhere to the principles of good business practice in the conduct of its business affairs, and NYSE American Rule 476(a)(6) by failing to observe high standards of commercial honor and the just and equitable principles of trade, when it had a previously executed customer order nullified and adjusted to an inferior price, in violation of the Firm's best execution obligations. The nullification and adjustment occurred without customer knowledge and consent, and to a price outside of NYSE American's best bid and offer, in violation of NYSE American Rule 966NY. 4. During the period January 1, 2013, through July 26, 2017, Merrill Lynch violated NYSE American Rule 320 by failing to implement adequate supervisory systems and controls reasonably designed to achieve compliance with NYSE American Rule 966NY, as well as NYSE American Rules 16 and 476(a)(6) as they pertain to the best execution of client multi-leg options transactions. 5. During the period September 23, 2013, through August 31, 2015, Merrill Lynch violated NYSE American Rule 320 by failing to implement adequate supervisory systems and controls, and adequate written supervisory procedures, reasonably designed to ensure the preservation of certain documents and information that the Firm knew, or reasonably should have known, potentially were relevant to possible regulatory action. Violations Concerning the July 27, 2015 Trade 6. At all relevant times, NYSE American Rule 16 required that "Every member and member organization shall at all times adhere to the principles of good business practice in the conduct of its business affairs." NYSE American Rule 476(a)(6) authorized the imposition of fine, censure, and other penalties for "failing to observe high standards of commercial honor and just and equitable principles of trade." 7. Further, at all relevant times, NYSE American Rule 966NY permitted the nullification and adjustment of an options trade "if the parties to the trade agree[d] to the nullification or adjustment" and if the trade was "adjusted to a price that was permissible and in compliance with any applicable rules of the Exchange or the Securities and Exchange Commission, as amended, at the time the original transaction was executed." 8. On July 27, 2015, a Merrill Lynch sales trader ("Sales Trader") received an order from a Firm customer to purchase 4,000 September 105 calls for a certain company ("XYZ"), tied to an order to sell 115,000 shares of XYZ stock. The Sales Trader communicated the order to a Merrill Lynch options trader ("Options Trader"), who in turn sought to fill the order through an interdealer broker. At the time the Options Trader placed the order with the interdealer broker, the NYSE American best offer for
the September 105 calls was $2.20. 9. After the interdealer broker initially failed to locate a counterparty for the customer order, the Options Trader instructed the interdealer broker to purchase the options at "$2.20 cross what," meaning that the Options Trader had agreed on behalf of Merrill Lynch to sell to the Firm's customer whatever options contracts the interdealer broker could not purchase elsewhere. 10. The interdealer broker did not find another seller, and the facilitated cross transaction executed on NYSE American, with Merrill Lynch selling 4,000 September 105 calls to its customer at $2.20. At the time of execution, the NYSE American best offer was $2.20. Approximately one minute later, the Sales Trader informed the customer that the Firm had printed the trade at $2.20. 11. Shortly thereafter, the interdealer broker called the Options Trader to inform him of the execution, stating that "you're gonna be up brother." In response, the Options Trader instructed the interdealer broker that the price of the options trade was now $2.25. The original transaction was nullified and reprinted at $2.25, and the interdealer broker called the Options Trader to inform him of the adjusted execution price, stating that "you're up $2.20, but I'm printing it $2.25." The Options Trader and Sales Trader later informed the Firm's customer that the order had in fact executed at $2.25, but made no mention of the original execution, the nullification, or the adjusted print. 12. In light of the above, the Options Trader knew, or should have known, that at his instruction, the facilitated cross transaction had executed at $2.20, was nullified, and was adjusted to a price of $2.25. The effect of the nullification and adjustment was that Merrill Lynch had sold the options contracts to its customer for an additional $20,000, in violation of the Firm's duty of best execution. Based on the foregoing, Merrill Lynch failed to adhere to the principles of good business practice in the conduct of its business affairs, in violation of NYSE American Rule 16, and failed to observe high standards of commercial honor and the just and equitable principles of trade, in violation of NYSE American Rule 476(a)(6). 13. In addition, the Options Trader knew, or should have known, that the original facilitated cross transaction was nullified and adjusted. However, neither the Options Trader nor any other Firm employee informed the Firm's customer of this nullification and adjustment or obtained customer consent. Moreover, the adjusted price would not have been permissible under NYSE American rules at the time of the original execution. Based on the foregoing, Merrill Lynch violated NYSE American Rule 966NY. Violations Concerning the Failure to Supervise Options Trading 14. At all relevant times, NYSE American Rule 320 set forth certain requirements regarding offices, supervision, and control of NYSE American members and member organizations. NYSE American Rule 320(e) required that members "establish,
maintain, enforce and keep current a system of compliance and supervisory controls, reasonably designed to achieve compliance with applicable securities laws and regulations and Exchange rules." 15. During the period January 1, 2013, through July 26, 2017, Merrill Lynch conducted two surveillance reviews related to the best execution of client options orders and the nullification or adjustment of client options transactions. First, supervisors with responsibility for options trading conducted daily reviews of a report of U.S. options executions associated with single-leg client options orders that were executed at prices outside the National Best Bid and Offer (the "Best Execution Review"). Second, supervisors reviewed the Firm's Trade Adjustment Report, which displayed manual changes made to options trades in the Firm's booking system, including changes to execution price (the "Nullification/Adjustment Review"). 16. However, as noted in paragraph 15, supra, the Best Execution Review considered only single-leg client options orders, and thus the Firm failed to review for best execution any client options orders that contained more than one purchase or sale. In addition, as noted, the Firm's Nullification/Adjustment Review considered only those circumstances in which Firm personnel manually self-reported that a nullification or adjustment had taken place. As a result, neither review included the July 27, 2015 Trade, and the above-mentioned rule violations went undetected by the Firm. 17. Based on the foregoing, Merrill Lynch violated NYSE American Rule 320. Violations Concerning the Failure to Supervise Document Preservation 18. As set forth in paragraph 14, supra, at all relevant times, NYSE American Rule 320(e) set forth certain supervisory requirements, including the requirement to establish, maintain, enforce, and keep current supervisory controls reasonably designed to achieve compliance with applicable securities laws and regulations and Exchange rules. NYSE American Rule 320(e)(1) further set forth that "Such system of compliance and supervisory controls must include written compliance and supervisory policies and procedures." 19. During the period September 23, 2013, through August 31, 2015, certain regulatory inquiries, including those from FINRA Market Regulation on behalf of NYSE American, were handled by the Firm's Compliance Regulatory Inquiries Group ("CRIG"), which was a part of the Firm's Compliance Department. However, CRIG lacked a formal written policy or procedure concerning the preservation of documents or information in light of potential regulatory action. 20. Based on the foregoing, Merrill Lynch violated NYSE American Rule 320. RELEVANT PRIOR DISCIPLINARY HISTORY 21. The Firm does not have prior disciplinary history for violations of NYSE American Rule 966NY, NYSE American Rules 16 or 476(a)(6) as they pertain to the best execution of client options orders, or NYSE American Rule 320 as it pertains to
supervision related to the best execution, nullification, or adjustment with respect to client options orders, or to the preservation of documents. OTHER FACTORS 22. In connection with NYSE Regulation's investigation, Merrill Lynch paid its customer $20,000 in restitution. SANCTIONS B. The Fir II also consents to the imposition of the following sanctions: 1. Censure and fine in the amount of $135,000 The Film agrees to pay the monetary sanction(s) upon notice that this AWC has been accepted and that such payment(s) are due and payable. The Firm has submitted a Method of Payment Confirmation form showing the method by which it will pay the fine imposed. The Firm specifically and voluntarily waives any right to claim that it is unable to pay, now or at any time hereafter, the monetary sanction(s) imposed in this matter. The Firm agrees that it shall not seek or accept, directly or indirectly, reimbursement or indemnification from any source, including but not limited to payment made pursuant to any insurance policy, with regard to any fine amounts that the Firm pays pursuant to this AWC, regardless of the use of the fine amounts. The Firm further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state, or local tax for any fine amounts that the Firm pays pursuant to this AWC, regardless of the use of the fine amounts. 2. Undertaking Within 60 days of the execution of this AWC, the Firm agrees to certify that deficiencies in its supervisory procedures discussed in paragraphs 14-16, supra, have been addressed through implementation of procedures that are reasonably designed to achieve compliance with the rules and regulations cited herein pertaining to the best execution, nullification, or adjustment of client options trades. The sanctions imposed herein shall be effective on a date set by NYSE Regulation staff II. WAIVER OF PROCEDURAL RIGHTS The Firm specifically and voluntarily waives the following rights granted under the NYSE American Code of Procedure: A. To have a Formal Complaint issued specifying the allegations against the Firm; B. To be notified of the Formal Complaint and have the opportunity to answer the
allegations in writing; C. To defend against the allegations in a disciplinary hearing before a hearing panel, to have a written record of the hearing made and to have a written decision issued; and D. To appeal any such decision to the Exchange's Board of Directors and then to the U.S. Securities and Exchange Commission and a U.S. Court of Appeals. Further, the Firm specifically and voluntarily waives any right to claim bias or prejudgment of the Chief Regulatory Officer of NYSE American; the Exchange's Board of Directors, Disciplinary Action Committee ("DAC"), and Committee for Review ("CFR"); any Director, DAC member, or CFR member; Counsel to the Exchange Board of Directors or CFR; any other NYSE American employee; or any Regulatory Staff as defined in Rule 9120 in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including acceptance or rejection of this AWC. The Film further specifically and voluntarily waives any right to claim that a person violated the ex parte communication prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection. III. OTHER MATTERS The Firm understands that: A. Submission of this AWC is voluntary and will not resolve this matter unless and until it has been reviewed by NYSE Regulation, and accepted by the Chief Regulatory Officer of NYSE American pursuant to NYSE American Rule 9216; B. If this AWC is not accepted, its submission will not be used as evidence to prove any of the allegations against the Firm; and C. If accepted: 1. The AWC shall be sent to each Director and each member of the Committee for Review via courier, express delivery or electronic means, and shall be deemed final and shall constitute the complaint, answer, and decision in the matter, 25 days after it is sent to each Director and each member of the Committee for Review, unless review by the Exchange Board of Directors is requested pursuant to NYSE American Rule 9310(a)(1)(B); 2. This AWC will become part of the Firm's permanent disciplinary record and may be considered in any future actions brought by the Exchange, or any other regulator against the Firm; 3. NYSE American shall publish a copy of the AWC on its website in
accordance with NYSE American Rule 8313; 4. NYSE American may make a public announcement concerning this agreement and the subject matter thereof in accordance with NYSE American Rule 8313; and 5. The Firm may not take any action or make or permit to be made any public statement, including in regulatory filings or otherwise, denying, directly or indirectly, any finding in this AWC or create the impression that the AWC is without factual basis. The Firm may not take any position in any proceeding brought by or on behalf of the Exchange, or to which the Exchange is a party, that is inconsistent with any part of this AWC. Nothing in this provision affects the Firm's (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Exchange is not a party. D. A signed copy of this AWC and the accompanying Method of Payment Confirmation form delivered by email, facsimile or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy. E. The Firm may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. The Firm understands that it may not deny the charges or make any statement that is inconsistent with the AWC in this Statement. Any such statement does not constitute factual or legal findings by the Exchange, nor does it reflect the views of NYSE Regulation or its staff. The Firm certifies that, in connection with each of the Exchange's requests for documents in connection with this matter, the Firm made a diligent inquiry of all persons who reasonably had possession of responsive documents, and that those documents have been produced or identified in a privilege log. The Firm acknowledges that, in agreeing to the AWC, the Exchange has relied upon, among other things, the completeness of such document production. The undersigned, on behalf of the Firm, certifies that a person duly authorized to act on its behalf has read and understands all of the provisions of this AWC and has been given a full opportunity to ask questions about it; that it has agreed to the AWC's provisions voluntarily; and that no offer, threat, inducement, or promise of any kind, other than the terms set forth herein and the prospect of avoiding the issuance of a Complaint, has been made to induce the firm to submit it. / 91/4 2"/ - Merrill Lynch, Pierce, Fenner & Smith Incorporated, Respondent -BY: Joa ui. Sena sociate General Counsel