The brokerage arm of Bank of America has agreed to pay a $5 million penalty for failing to report millions of over-the-counter options positions, Finra announced today.
Between January 2009 and October 2020, New York-City-based broker-dealer BofA Securities, with 5,000 registered individuals and 130 branches, failed to report OTC options positions to the Large Options Positions Reporting system (LOPR) in more than 7.4 million instances, Finra said. Twenty-six of the unreported positions were also over the applicable OTC position limit of either 25,000 or 50,000 contracts, Finra said in a statement today.
BofA Securities (BofAS), which did not immediately respond to a request for comment on the charges, settled the matter and consented to the entry of Finra's findings, without admitting to or denying the charges, the regulator said In addition to the $5 million fine, the firm agreed to a censure and a requirement that an officer and principal of the firm certify it has established and enforces supervisory procedures reasonably designed to achieve compliance by October 31.
Finra requires member firms to report large options positions to its LOPR so the regulator can “surveil for potentially manipulative behavior, including attempts to corner the market in the underlying equity, leverage an option position to affect the price or move the underlying equity to change the value of a large option position,” the regulator said.
According to Finra, the BofAS business was formerly an institutional brokerage unit of Merrill Lynch which was sold through an internal transaction in 2018. Bank of America acquired Merrill Lynch in 2009 during the financial crisis.
"Finra relies on accurate reporting of transactions in order to maintain the integrity of the markets," said Jessica Hopper, executive vice president and head of Finra's Department of Enforcement. “BofAS’s failure to report millions of OTC options positions prevented Finra from carrying out that core function for transactions that carry substantial risks.”
Finra said BofAS’s activity violated Rule 2360, which requires member firms to report large options positions to its LOPR, and Rule 2010, which sets out standards of commercial honor and principals of trade.
In addition, Finra found that from January 2014 through October 2020, the firm’s supervisory system “was not reasonably designed” to comply with its LOPR reporting obligations, a violation of Finra Rules 3110 and 2010, which govern supervisory requirements.
“Among other things, the firm did not have an effective system to detect whether there were positions that should have been reported to the LOPR, but were not,” the regulator said.
Finra's Trading and Financial Compliance Examinations Group detected the violations through the group’s review of OTC exercise limits, which were not reported to Finra’s Large Options Positions Reporting system (LOPR), according to regulator.
There is no independent source of data for regulators to review OTC options activity, which makes accurate LOPR reporting essential to regulatory surveillance, Finra added.