Merrill Lynch accepted the fine and agreed to pay $415 million in addition to admitting wrongdoing to settle charges the firm misused customer cash to generate profits for itself.
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Merrill, a wholly-owned subsidiary of Bank of America, from 2009 through 2012 engaged in complex options trades that enabled it to “artificially” reduce its stash of cash held for customer accounts, freeing up to US$5 billion for use by the bank, the Securities and Exchange Commission said.
The 5 million settlement is “by far the largest” relating to a customer protection violation in the SEC’s history, Andrew Ceresney, director of the SEC’s division of enforcement, said during a media call Thursday.
Merrill kept up to US$58 billion of a customer securities in a clearing account from 2009 to 2015 that was subject to a general lien, exposing that cash to potential loss, regulators said.
“While no customers were harmed and no losses were incurred, our responsibility is to protect customer assets, and we have dedicated significant resources to reviewing and enhancing our processes”, Merrill Lynch spokesman William Halldin said in a statement. “The issues related to our procedures and controls have been corrected”.
Bank of America said it cooperated with SEC investigators.
The regulator also announced a new initiative to uncover abuses tied to its customer protection rule, which mandates how brokers should safeguard client balances and segregate funds from other business operations.
In a series of communications with Wall Street regulators starting in 2009, Mr. Tirrell and the bank omitted key facts and failed to update regulators about changes to the structure or goal of the trades, the SEC said.
For customer cash, for instance, broker-dealers must have a reserve of funds or qualified securities in an account at a bank that is “at least equal in value to the net cash owed to customers”, it says, in accordance with a specific formula contained in the rule. Merrill held additional customer securities in accounts worldwide that were also subject to similar liens.
Separately, Merrill Lynch agreed to pay a $10 million SEC settlement for misleading statements it gave retail investors in offering materials for structured notes linked to the brokerage’s proprietary volatility index. The transactions in question “lacked economic substance” and allowed Merrill Lynch to finance its own trading activities.
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The loans reduced the amount of funds the bank held as a cushion and lowered its financing costs, the SEC said. The Journal earlier this year reported on Bank of America’s dismantling of SEFT following heightened scrutiny of its activities, including separate trades that helped clients avoid stock-dividend taxes.
