Merrill Lynch, Pierce, Fenner & Smith Incorporated will pay a $850,000 fine to settle charges that it improperly closed out fail-to-deliver positions resulting from short sales in equity securities and improperly calculated net positions of two independent trading units that were hedging with derivatives, Finra announced.

According to the filed letter of acceptance, waiver and consent, from September 2013 to July 2016 Merrill Lynch improperly netted the trading activity of five affiliated broker-dealer customers when determining their close-out obligations and claiming pre-fail credit. In doing this, the firm misapplied the SEC’s guidance in using a “multi-day approach” to aggregating net purchases, and did so on at least 6,000 occasions, according to Finra.

One of the conditions specified by the SEC when applying the multiday approach, the filing stated, is that a firm cannot use net purchases from a broker-dealer affiliate to claim credit for a fail that is not attributable to that affiliate. Merrill Lynch instead netted the trading accounts of the five affiliates and then calculated the fail-to-deliver positions attributed to their trading on a collective basis. The firm also combined the positions to calculate one pre-fail credit and used that credit to reduce the number of shares it bought to close out those fail-to-deliver positions, the filing said.

“Merrill’s application of the multi-day approach applied pre-fail credit without regard to the [affiliates’] respective pre-settlement purchases and short positions, and allowed the [affiliates] to use purchases made by another [affiliate] to reduce their close-out obligations when they had a short position in the purchased security,” Finra said.

In addition, for the 10 years from January 2005 to January 2015, Merrill also acted improperly when it included securities positions held by the firm’s foreign and non-broker-dealer affiliates when calculating the net positions of two independent trading units that were trading derivatives to hedge exposure. And finally, from January 2005 until July 2017, the firm failed to establish and maintain a supervisory system designed to achieve compliance in this second matter.

Bill Halldin, spokesperson for Merrill Lynch’s parent company Bank of America, could not be reached for comment by press time.