Best stocks to invest in – BofA’s Merrill Lynch Agreed to a $415M Settlement with SEC



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Bank of America Corporation’s BAC Merrill Lynch unit agreed to pay $415 million to the Securities and Exchange Commission (“SEC”) to settle the probe related to breach of the rules designed to protect client accounts.

The firm admitted wrongdoing to resolve the SEC accusations that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors.

“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,” Halldin added.

BofA said it cooperated fully with the SEC investigation and the settlement will not impact second-quarter results.

Matter In Brief


The SEC investigation was first revealed by a Wall Street Journal report in April last year and the planned settlement was also disclosed by the Wall Street Journal on Wednesday, a day before the final settlement. The SEC began a probe to verify whether BofA violated rules set for safeguarding customer accounts and putting retail-brokerage funds at risk for more profits.

According to Andrew Ceresney, the SEC’s enforcement director, Merrill Lynch violated a SEC rule for protecting customers’ assets by holding up to $58 billion a day in a clearing account from 2009 to 2015. Moreover, Merrill Lynch disregarded the SEC’s Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account.

The firm also adopted an unusual strategy and inadeuqate controls for certain client accounts and retail brokerage funds. Also, Merrill Lynch used complex trades and loans to save millions of dollars in funding costs along with easing billions of dollars in cash and securities for its own uses, instead of keeping it inaccessible in order to meet regulatory requirements.

This freed up billions of dollars per week from 2009 to 2012, which was used by Merrill Lynch to finance its own trading activities. The firm’s customers would have been exposed to a massive deficit in the reserve account in the event of an unexpected trading failure.

The use of such a strategy was, however, halted by Merrill Lynch in mid-2012 due to internal debate regarding its possible regulatory and other related risks.

SEC Actions

Apart from the $415 million settlement with Merrill Lynch, the SEC also sued William Tirrell, who served as Merrill Lynch’s Head of Regulatory Reporting when the firm was misusing customer cash in direct violation of the Customer Protection Rule.

According to the SEC, Merrill Lynch also violated a SEC rule by using language in severance agreements to impede employees from voluntarily providing information to the SEC. The company has since revised the agreements and launched a whistleblower training program for employees.

“The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed,” said Ceresney.  “Merrill Lynch violated these rules, including during the heart of the financial crisis, and the significant relief imposed today reflects the severity of its failures,” he added.

The SEC also announced a two-part initiative designed to uncover additional abuses of the Customer Protection Rule, which encourages broker-dealers to proactively report potential violations of the rule to the SEC.

Another Merrill Lynch Settlement

BofA’s Merrill Lynch unit also agreed to pay a separate $10 million penalty to settle charges that it was responsible for misleading statements in offering materials provided to retail investors for structured notes linked to a proprietary volatility index.

Also, the firm’s 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% of the index value each quarter.

This is the SEC’s second case involving misleading statements by a seller of structured notes. In Oct 2015, UBS Group AG UBS agreed to pay $19.5 million to resolve similar charges.

Our Take

Wall Street biggies such as BofA, The Goldman Sachs Group, Inc. GS  and Wells Fargo & Company WFC continue to be in focus for persisting investigations pertaining to their past business malpractices.

For BofA, these lawsuits and settlements add to its numerous litigation headwinds. The company continues to strive hard to get past its legal matters and focus on its core operations.

Currently, BofA holds a Zacks Rank #4 (Sell).

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