Report Pursuant To Section 8(a)(1) Of The Commodity Exchange Act.

        March 19, 1997


        The staff of the Division of Enforcement ("Division") of the 
Commodity Futures Trading Commission ("Commission") has conducted 
an investigation into certain events involving Merrill Lynch, 
Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), and the manner in 
which the management of Merrill Lynch fulfilled its obligations 
under the Commodity Exchange Act, as amended ("Act"), and 
Regulation 166.3 thereunder. 1
   Based upon information obtained 
during the investigation, the Commission deems it appropriate and 
in the public interest to issue this Report of Investigation 
("Report") pursuant to Section 8(a)(1) of the Act. 2 

        The investigation on which this Report is based was not an 
adjudicatory proceeding and no hearing has been conducted by the 
Commission regarding any of the issues of fact or law contained 
herein.  Merrill Lynch has not admitted the facts or conclusions 
stated in this Report.

        II.  FACTS
        In November 1989, Merrill Lynch hired Richard Conroy Bell 
("Bell") as a financial consultant ("FC") at its Tulsa, Oklahoma 
"Kensington" branch office.  Bell became registered with the 
Commission as an associated person ("AP") of Merrill Lynch in the 
summer of 1990. 

        During 1990, without the knowledge or consent of Merrill 
Lynch, Bell began operating a commodity pool without registering 
with the Commission as a commodity pool operator ("CPO"), as 
required by the Act.  Bell received approximately $16 million 
from investors, which was to be pooled and used to trade 
commodity futures.  Instead of investing customer funds, Bell 
operated a classic "Ponzi" scheme, using later investors' funds 
to pay fictitious profits to earlier investors.  No commodity 
futures or options were ever actually traded.  A significant 
portion of investor funds was used by Bell for personal 
purchases, including his house, cars, and an airplane.  In total, 
Bell solicited and defrauded approximately 110 participants in 
the pool.

        Bell, without the knowledge or consent of Merrill Lynch, 
operated his fraudulent scheme from Merrill Lynch's Kensington 
Branch office for approximately two years until he incorporated 
another entity and opened an office in Midland, Texas in 
approximately April 1992.  At no time did Bell represent to 
investors or potential investors that his pool was a Merrill 
Lynch sponsored investment.  Rather, he stated that the 
investment opportunity that he was offering was a separate and 
distinct outside business venture, of which Merrill Lynch was 
aware and permitted him to pursue.

        Bell's fraudulent commodity pool continued to operate until 
approximately November 1993, when the Commission filed an 
injunctive action in the United States District Court for the 
Northern District of Oklahoma against defendants Bell and other 
related entities.  Bell admitted to the wrongdoing charged in the 
Commission's Complaint, and an Agreed Order of Preliminary 
Injunction was entered against all defendants as to all counts of 
the Complaint by the U.S. District Court.  On October 20, 1994, 
the United States Attorney for the Northern District of Oklahoma 
charged Bell with wire fraud in a single-count information.  Bell 
pled guilty to the count and was sentenced to a forty-four month 
prison term.  Bell is currently incarcerated. 3 

Merrill Lynch's Knowledge of Bell's Activities
        At the time he entered into employment with Merrill Lynch, 
Bell was required to disclose to the firm all outside business 
activities.  Merrill Lynch required its personnel to complete an 
"outside interest questionnaire" annually.  The purpose of the 
questionnaire was to identify all outside activities engaged in 
by the employee which "would be in conflict with [Merrill Lynch] 
policy or Exchange rules."  Merrill Lynch required such 
information in order to determine whether there was a possible 
conflict of interest between an employee's outside business 
activities and the activities conducted by the employee on behalf 
of the firm.

        All outside interests were required to be reviewed and 
approved by Merrill Lynch's Law and Compliance Department. 
Although Merrill Lynch required its personnel to file outside 
interest questionnaires annually, it was unable to produce to the 
Commission any questionnaires executed by Bell prior to October 
8, 1991.  In his October 1991 questionnaire, Bell stated that he 
was a "participant in oil & gas venture: on interests held prior 
to joining firm."  He described his position as "working interest 
& royalty owner."  The questionnaire response contained no other 
specific information as to this outside interest.  Bell did not 
provide any information concerning compensation received from the 
outside activity, as required by the questionnaire.  The Division 
investigation revealed no evidence that this outside interest was 
ever approved by Merrill Lynch.

Inquiries Regarding Bell's Activities
        In March and April of 1992, Merrill Lynch received inquiries 
regarding Bell's conduct from three different sources.  In early 
March 1992, the branch manager of the Kensington office was 
contacted by an acquaintance who informed him that Bell had 
solicited an investment from his secretary for a transaction 
which involved the sale of oil futures.  

        Approximately three weeks later, the same branch manager was 
contacted by a Professor of Finance at the University of Tulsa 
Business School.  According to the branch manager, the Professor 
said that Bell had solicited one of his students "for an 
investment in Mr. Bell's oil deal that sounded 'too good to be 
true'...."  The Professor conveyed his skepticism about the 
legitimacy of this investment.  The Professor also told the 
branch manager that approximately two dozen of his student's 
fellow employees had already invested with Bell.  He questioned 
whether permitting a stockbroker to offer investments not 
sponsored by Merrill Lynch violated securities regulations. 
        Finally, in early April 1992, the Oklahoma Department of 
Securities ("ODS") contacted Merrill Lynch.  ODS informed Merrill 
Lynch that it was investigating the Professor's complaint and 
sought information regarding Bell's outside business activities.
According to ODS, Merrill Lynch's branch manager acknowledged 
receiving the call from the Professor and stated that he had 
reviewed with Bell his outside business activities.  Bell told 
the branch manager and ODS that he would take immediate steps to 
take all of his customers out of the deal by refunding all of 
their money.

        After receiving these inquiries, Merrill Lynch initiated an 
internal investigation into Bell's activities. As part of that 
investigation, Merrill Lynch reviewed Bell's October 1991 outside 
interest questionnaire, which had never been revised.  In 
describing his outside activity, Bell had not disclosed that he 
was soliciting investors.  Instead, he had stated that he was 
only a "participant" and that his position was "working interest 
and royalty owner." 
        Merrill Lynch interviewed Bell and received both oral and 
written representations from him pertaining to his outside 
business activity.  Bell falsely represented that he was a 
passive investor and that he had not solicited investors, but 
rather had limited contact with eight local individuals on behalf 
of the business entity, headquartered in Midland, Texas.  Bell 
also falsely represented to Merrill Lynch that his outside 
business venture did not involve futures trading and that all 
eight investors with whom he had communicated had been refunded 
their investments.   
        In response to the ODS inquiry, Bell drafted a written 
response, dated May 19, 1992, which he gave to Merrill Lynch for 
its review.  Merrill Lynch told Bell that his response was 
inadequate.  Bell redrafted his response, dated May 20, 1992, 
falsely stating that the outside business activity was intended 
to be "a private placement and that the parties involved were all 
knowledgeable individuals... none of which were clients of [his] 
at Merrill Lynch."  He added that he "did not solicit 
participants... nor did [he] profit from their participation or 
charge a commission."  Merrill Lynch determined that the redraft 
was acceptable, and Bell sent it to ODS.

        Merrill Lynch did nothing to confirm or corroborate any of 
the oral or written representations prepared by Bell.  It did not 
contact any of the named investors.  Instead, Merrill Lynch's Law 
and Compliance Department instructed one of Bell's supervisors to 
check the names of the eight investors that Bell had disclosed 
against Merrill Lynch's customer list.  When it determined that 
none of the eight investors which Bell disclosed were Merrill 
Lynch customers, Merrill Lynch concluded that nothing more was 
required of it because Bell's outside activity did not conflict 

with Merrill Lynch offered investments. 4 
        At the direction of Merrill Lynch management, Bell completed 
a new outside interest questionnaire disclosing in more detail 
his interest in this outside business venture, consistent with 
his prior oral and written misrepresentations to Merrill Lynch.  
After reviewing Bell's new disclosure and accepting Bell's 
representations, without any further inquiry, Merrill Lynch 
approved Bell's outside business activity.

Termination of Bell's Employment
        In November 1992 and January 1993, Merrill Lynch became 
aware of substantial deposits made by Bell to his own Merrill 
Lynch cash management account totalling approximately $66,000. 
These deposits were inconsistent with Bell's known income 
level. 5   The branch manager at the Kensington office asked Bell 
for an explanation.  Bell stated that the source of the income 
was his outside business venture which was paying more than 
anticipated (as previously disclosed in his newly completed 
outside interest questionnaire) because of a second recovery 
drilling technique.  Once again, Merrill Lynch simply accepted 
Bell's explanation without further investigation.

        In April 1993, Merrill Lynch discovered that Bell had been 
falsifying financial foundation applications for a Merrill Lynch 
financial service which analyzes the applicant's financial 
condition and makes investment recommendations.  Specifically, 
Bell had been submitting financial foundation applications for 
fictitious people.  On April 30, 1993, at the request of Merrill 
Lynch, Bell resigned his position as a FC and terminated his 
registration as an AP. 

        III.  ANALYSIS
Requirements of Regulation 166.3
Commission Regulation 166.3 requires that:
Each Commission registrant, except an 
associated person who has no supervisory 
duties, must diligently supervise the 
handling by its partners, officers, employees 
and agents (or persons occupying a similar 
status or performing a similar function) of 
all commodity interest accounts carried, 
operated, advised or introduced by the 
registrant and all other activities of its 
partners, officers, employees and agents (or 
persons occupying a similar status or 
performing a similar function) relating to 
its business as a Commission registrant.

        Regulation 166.3 was intended "to provide some protection to 
customers by requiring that APs - who directly solicit the public 
- be supervised by an entity registered with the Commission."  
CFTC v. Commodities Fluctuation Systems, Inc., 583 F. Supp. 1382, 
1384-85 (S.D.N.Y. 1984).   
        In many instances, the outside business activities of 
individual employees may have direct impact on an FCM's duty to 
supervise activities relating to its business as a Commission 
registrant.  For instance, information regarding an employee's 
outside activity which raises questions about whether the 
employee has deceived or misled either his employer or others 
with regard to activities relating to the employer's business as 
a Commission registrant may be relevant to an assessment of the 
employee's ability to perform activities which are required to be 
supervised.  Once issues of honesty and integrity relating to or 
impacting upon the FCM's business as a Commission registrant are 
brought to the registrant's attention, the registrant must 
conduct sufficient inquiry in order to determine what impact that 
information will have on the employee's ability to perform duties 
within the scope of employment and the appropriate level of 
supervision required of that employee.  Such information 
necessarily relates to a firm's duty to provide diligent 
supervision over activities relating to its "business as a 
Commission registrant." 

        After Merrill Lynch was contacted by three parties, 
including a state regulatory agency, Merrill Lynch, at a minimum, 
 was on notice that Bell was involved in an outside business 
venture that may have been related to Merrill Lynch's business as 
a Commission registrant -- that is, the sale of oil futures -- 
that was possibly different in material respects from the outside 
interest that he had disclosed on his questionnaire.  Merrill was 
also on notice that serious questions had been raised concerning 
his conduct of that business.

        The Commission believes that, consistent with Regulation 
166.3, when a registrant becomes aware, as Merrill Lynch did 
here, that the disclosures of an employee regarding such outside 
business activity are found to be incomplete or inaccurate in 
some material respect or raise material issues that might impact 
the performance of his duties relating to the registrant's 
business as a registrant, the registrant has a duty to 
investigate sufficiently in order to permit it to make an 
informed determination whether the employee's outside activity 
actually does or does not relate to or impact upon the FCM's 
"business as a Commission registrant."   If the sole source of 
the information is the employee engaging in such outside 
activity, the registrant must perform adequate additional inquiry 
to ensure that the employee's disclosure is accurate in all 
material respects. 6   The scope of such additional inquiry will 
depend upon the facts and circumstances of each case.

        The testimony of Merrill Lynch officials reflects that the 
scope of the inquiry into Bell's activities was limited to 
determining 1) whether Bell had a conflict of interest with 
Merrill Lynch; and 2) whether his outside activity involved any 
Merrill Lynch customers.  An inquiry limited to these two areas 
would not necessarily be sufficient to determine whether or not 
the outside activity in question related to or impacts upon an 
FCM's  "business as a Commission registrant."  For example, an 
employer may receive information concerning the conduct of an 
employee in business activity which is outside the scope of his 
or her duties at an FCM which may raise issues regarding the 
employee's fitness to perform his or her duties on behalf of that 
FCM or the level of supervision required by that employee.  Under 
those circumstances, the FCM needs to satisfy itself as to those 
issues.  This will be the case regardless of whether or not the 
registrant had a duty to supervise directly the outside 
activities in question. See Lobb v. J.T. McKerr & Co. [1987-1990 
Transfer Binder] Comm. Fut. L. Rep. (CCH) &24,568 at 36,444 
(CFTC May 28, 1989).  

        Thus, after interviewing Bell, and determining that the 
activity that he was conducting had not been adequately and fully 
disclosed on his outside interest questionnaire and that it 
raised issues relating to Merrill Lynch's business as a 
Commission registrant, Merrill Lynch could not rely solely on 
Bell's representations in determining that his outside activity 
did not, in fact, relate to its "business as a Commission 
        Adequate systems of supervision by registrants are not 
required to detect all instances of violative conduct. 7 
While there has been no judicial or administrative adjudication 
in this matter, the Commission believes that the investigation 
done by Merrill Lynch concerning Bell's outside business 
activities, in light of the information that had come to its 
attention, especially inquiries from a state regulatory 
authority, was inadequate.  Because the issue of what level of 
inquiry a registrant is required to make regarding the outside 
business activities of its employees when those activities appear 
to raise issues relating to its business as a Commission 
registrant, is one of first impression, the Commission, in its 

discretion, has determined to issue this Report, in lieu of 
bringing an enforcement action against Merrill Lynch.

By the Commission, Commissioner Tull dissenting.

                                                        Jean A. Webb
                                                        Secretary to the Commission

Dated:  March 19, 1997


1  Merrill Lynch has been registered with the Commission as a 
futures commission merchant ("FCM") since at least 1982.

2 Section 8(a)(1) of the Act authorizes the Commission to 
"publish from time to time the results of any... investigation... 
as it deems of interest to the public."   

3  The Commission notes that Merrill Lynch has paid a total of 
approximately $3.5 million to investors through the Receiver in 
the Commission's injunctive action against Bell.  This represents 
approximately 44% of total investor losses.

4  In fact, several of the approximately 110 investors in Bell's 
scheme were Merrill Lynch customers.

5  Merrill Lynch reviews all employee accounts maintained at 
Merrill Lynch on a monthly basis.  One of the purposes of this 
review is to identify those employees with a cash flow exceeding 
their income.  Such employees may be engaged in illegal activity 
or activity that conflicts with Merrill Lynch's policies or 

6  An adequate investigation must go beyond questioning an 
employee and taking his word.  See In the Matter of GNP 
Commodities Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. 
(CCH) &25,360 at 39,219 (August 11, 1992), aff'd sub nom. 
Monieson v. GNP, 996 F.2d 852 (7th Cir. 1993).

7  See, e.g., Callahan v. Delphi Commodities, [1987-1990 
Transfer Binder] Comm. Fut. L. Rep. (CCH) &24,060 (CFTC December 
18, 1987); Bunch v. First Commodity Corp., [1990-1992 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) &25,352 at 39,168 (CFTC August 
5, 1992).