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Regulator Slams Merrill Lynch with $425 Million in Fines

By Alex Padalka June 24, 2016

The Securities and Exchange Commission has slapped Merrill Lynch with close to half a billion dollars in fines for misusing clients’ cash for its own profit and failing to disclose fees tied to structured notes.

In the first case Merrill Lynch admitted to wrongdoing and agreed to settle for $415 million for violating the SEC’s Customer Protection Rule by using customer funds that should have been held in a reserve account for complex options trading for the firm, the regulator said in a statement. According to the SEC, the brokerage was able to free up billions of dollars each week from 2009 to 2012 for trades that “lacked economic substance” and could have exposed its customers to a substantial shortage in the reserve account had the trades failed, the regulator said in a press release.

The SEC also alleges William Tirrell, Merrill Lynch’s head of regulatory reporting at the time the firm was violating the Customer Protection Rule, failed to properly monitor the firm’s trades and report to the firm’s regulators on their substance and mechanics, according to the SEC. Tirrell will appear before an administrative law judge at a public hearing on an unspecified date, the regulator said.

As part of the same settlement, the SEC said Merrill Lynch failed to protect customers’ securities against possible third-party claims when it held up to $58 billion per day of clients’ securities from 2009 to 2015 in a clearing fund and other accounts that were exposed to potential liens had the firm collapsed, according to the regulator.

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Merrill Lynch was also accused of impeding employees from cooperating with the SEC through its severance contracts, and agreed to revise its agreements, policies and procedures and provide its staff with an annual summary of the protections afforded by the SEC to whistleblowers, as well as launch a mandatory whistleblower program for all employees at both Merrill Lynch and its parent company Bank of America.

The SEC also announced that it will further pursue other violators of the Customer Protection Rule by offering “cooperation credit and favorable settlement terms” for self-reporting potential violations and having its enforcement division perform a targeted sweep to determine broker-dealers’ compliance with the rule, the regulator said in its statement.

In another case against the brokerage, the SEC fined the firm $10 million for issuing misleading statements to investors about the costs associated with structured notes, the regulator said in a statement. The five-year notes tied to a proprietary volatility index and issued by Bank of America were alleged to have a 2% sales commission and a 0.75% annual fee, but the offering documents failed to disclose an “execution factor” equal to 1.5% of the value of the index payable each quarter, according to the regulator.

The regulator notes that it’s the second case involving misleading statements on the sales of structured notes and other complex investments. Last October, the SEC settled with UBS for $19.5 million for false or misleading statements on structured notes tied to a foreign exchange trading strategy, the regulator said in a statement.