Merrill Lynch Fined $42 Million by SEC for Misleading Clients Over Orders

The wealth manager told clients it was executing orders internally when they were really being passed on to other broker-dealers

The Securities and Exchange Commission (SEC), an American regulator, announced this Tuesday that it is fining Merrill Lynch $42 million. The fine or, to use the SEC’s terminology, ‘civil penalty, is the result of the wealth management firm misleading customers over order executions.

From 2008 to 2013, Merrill Lynch continually lied to its clients by stating that it had executed their orders internally. In reality, these orders were being executed at other broker-dealers, including proprietary trading firms and wholesale market makers.

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Internally, the company referred to this process as ‘masking.’ The firm did not just lie to customers but also reprogrammed its systems, altering reports and records to make them give false statements regarding orders’ trading venues.

Why Lie?

It appears that the firm did all of this to get reduced access fees to exchanges. By masking the true executors, the firm was able to make itself look like a more active trading center than it really was, hence enabling it to get reduced access fees.

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When Merrill Lynch stopped its masking efforts in May of 2013, it did not tell its customers about its past conduct. Instead, the firm took additional steps to cover its tracks and ensure no one would discover what it had been doing.

The SEC claimed in their statement on Tuesday that masking had affected over 15 million ‘child orders’ – segments of larger orders that have been broken down to be executed over a preset period. These 15 million orders were comprised of a total of 5 billion shares.

According to Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, Merrill Lynch deprived customers of the ability to ability to make informed decisions regarding their orders and broker-dealer relationships.

“Merrill Lynch,” Avakian said, “which admitted that it took steps to ensure that customers did not learn about this misconduct, fell far short of the standards expected of broker-dealers in our markets.”

Today’s announcement comes almost exactly two years after Merrill Lynched was fined for misleading customers on structured notes and breaking customer protection rules. On that occasion, the SEC fined the firm $425 million, over ten times the amount announced by the regulator yesterday.

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