Merrill Lynch Fined $425m For Misleading Investors and Misusing Assets

SEC and FINRA launched a crackdown on Merrill Lynch which will pay more than $400 million to settle several violations.

Bank of America’s broker-dealer arm, Merrill Lynch, has agreed to pay $425 million to ‎resolve several accusations from the Securities and Exchange Commission (SEC), ‎according to two separate announcements from the agency.

The SEC said its investigation ‎found multiple types of violation involving customer protection rules and misleading investors on structured notes.‎

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The US watchdog accused Merrill Lynch of two sets of violations. ‎First, instead of keeping customers’ investments in a safe reserve account, from ‎‎2009 through 2012 it engaged in “complex options trades that lacked ‎economic substance, allowing freed up billions of dollars per week that Merrill ‎Lynch used to finance its own trading activities,” the statement read.‎

In a second case, SEC announced that Merrill Lynch will pay a $10 million penalty ‎to settle the regulator’s claims that it violated federal securities laws through misleading ‎statements in offering materials provided to retail investors for structured notes ‎linked to a proprietary volatility index. ‎

In conjunction with this case, the regulator also announced Thursday an initiative to uncover additional abuses by encouraging broker-dealers to proactively report potential violations. In return, the commission will provide credit and favorable settlement terms in any enforcement recommendations arising from self-reporting.

Misusing customer cash

In announcing the first settlement, the US watchdog said Merrill ‎admitted to violating federal securities laws requiring broker-dealers to ‎protect the cash and securities of their clients, which began during the financial crisis ‎and in some cases continued as recently as this year.‎ Bank of America’s brokerage arm has agreed to pay $415 million to resolve the ‎regulator’s claims. The amount is divided into $57 million in disgorgement and interest plus a $358 million penalty.

Secondly, from 2009 to 2015, Merrill further violated the Customer Protection Rule by ‎failing to adhere to regulations that require holding the customers’ fully-paid securities in ‎lien-free accounts shielded from claims by third parties should a firm ‎collapse. ‎

Merrill Lynch held up to $58 billion per day of customer securities in a clearing ‎account that was subject to a general lien by its clearing bank and held additional ‎customer securities in accounts worldwide that similarly were subject to liens.‎

“Had Merrill Lynch failed at any point, customers would have been exposed to ‎significant risk and uncertainty of getting back their own securities,” the regulator noted. ‎

The SEC also sued the Merrill Lynch’s head of regulatory reporting, William Tirrell, in connection ‎with the case.‎

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Tirrell was ultimately responsible for determining how much money the firm ‎would reserve in its special account, and failed to adequately monitor the trades and ‎provide specific information to the regulators about the substance and ‎mechanics of the trades.

The litigated administrative proceeding against Tirrell will ‎be scheduled for a public hearing before an administrative law judge who will issue ‎an initial decision stating what, if any, remedial actions are appropriate.‎

‎ Second case‎ ‎

In an unrelated settlement, Merrill Lynch agreed to pay $10 million to the SEC over ‎allegations that brokers marketed complex offerings to customers without disclosing ‎hefty fees hidden within.‎

According to the SEC’s order instituting, the brokerage offered “materials emphasized that the notes were subject to a 2 percent sales ‎commission and 0.75 percent annual fee. Due to the impact of these costs over the ‎five-year term of the notes, the volatility index would need to increase by 5.93 ‎percent from its starting value in order for investors to earn back their original ‎investment on the maturity date.”

However, the offering materials failed to adequately ‎disclose a third cost included in the volatility index known as the “execution factor” ‎that imposed a cost of 1.5 percent of the index value each quarter.‎

FINRA is also here

The Financial Industry Regulatory Authority (FINRA) separately fined Merrill Lynch $5 ‎million for negligent disclosures related to the sale of five-year senior debt notes to ‎retail investors, the regulator said on Thursday.‎

Merrill Lynch cooperated fully with the SEC’s investigation and has engaged in ‎extensive remediation, including by retaining an independent compliance consultant ‎to review its compliance.

In a statement, Merrill spokesman noted that no customers were harmed or losses incurred in connection with ‎the activities.‎

“Our responsibility is to protect customer assets and we have dedicated significant resources to reviewing ‎and enhancing our processes. The issues related to our procedures and controls have been corrected,”‎ he added.

 

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